Written by Matthew Oulton
Janet Yellen, US Treasury Secretary, recently proposed a global minimum corporate tax rate.
It’s an age-old problem. Like the cousin who leeches off your Netflix account reaping the benefits without paying much (if anything) to the cost, multi-national corporations operate in developed countries without paying their subscription. Through a complex web of accountants and lawyers, companies which do most of their business in the US, the EU, or the UK pay corporation tax in far-flung tax havens.
This dodge doesn’t just deprive countries of revenue directly, it also puts pressure on politicians to compete in a winnerless ‘race to the bottom’. In 1980, the average global corporation tax rate was 40.11 percent; today, it stands at 23.45 percent. Some of this, admittedly, is due to Thatcher-style revolutions, in which the global consensus shifted away from taxing firms (and, indeed, taxation full stop). Much of the decrease, however, is due to rising globalisation. Multinationals can choose where to headquarter themselves, and, through arcane legal arrangements, where to register their profit. Although corporation taxes aren’t the only reason a firm would move country, they are an important factor and allowing companies to shop around benefits them to the detriment of the rest of us.
US Treasury Secretary Janet Yellen suggested this week that the US should work to coordinate a global minimum tax rate for corporations. Joe Biden is planning to raise the corporate tax rate to 28% from 21% and the imposition of a global minimum would reduce any damage to America’s business competitiveness. Behind his moderate veneer, Biden could end up bringing about the most profound change to the world economy since Bretton-Woods.
Overall, this measure is a very positive step. Regardless of what level you think corporation taxes should be at – and there is a meaningful debate to be had about the pros and cons of high taxes on companies – fear of firms relocating shouldn’t be a factor. If you believe that lowering corporation taxes would stimulate investment and growth, the zero-sum allure of poaching business from abroad shouldn’t be needed.
Now, there are some hurdles still to be overcome. Firstly, competition on Corporation Tax rates to attract investment is very important to some nations. Some nations, such as Ireland, Switzerland, and several British Overseas Territories, depend heavily on foreign investment, which is largely lured in through favourable tax codes. Developing countries are also more likely to rely on taxes on corporations and typically have lower tax rates. This makes sense – the US and EU both have numerous other ways to attract inward investment, including highly developed transport, education, and healthcare systems, which make headquartering in New York, San Francisco, Frankfurt, Paris highly attractive, meaning they can demand higher taxes in return. Removing competition via taxes would disadvantage those countries who arguably need tax revenue the most.
Secondly, enforcement is difficult. Firms that are based in foreign countries generally report to foreign regulatory agencies, so countries could easily set lower tax rates and hide it from the US. Problems like this are surmountable, though, with enough international support. Well-enforced property rights, unbiased courts, and other institutional factors are also very important to firms. Any regulations that are enforced in the largest economies and major tax havens are likely to cover all but the most determined firms. Large economies, like the US and EU, could also impose other taxes on multinationals which base themselves in tax havens. For example, the EU could tax revenue accrued in the 27 nation states by firms based in tax havens. This would create a powerful incentive for companies to declare their profits in the EU, making a minimum corporation tax easier to enforce. There is a potential sovereignty issue – global tax policy being dictated by Washington is less than ideal – but coordination conducted through international organisations could create a fair multilateral system.
Finally, a global minimum corporate tax rate that is too high could reduce flexibility and agility. After all, there are very good reasons to cut corporate tax rates – either specific sectors, such as defence, for reasons of national security, or potentially in recessions, to stimulate the economy. Likewise, there are many ways to tax corporations, some of which are not directly comparable. Preventing tax gouging is a laudable aim; reducing the ability for governments to trial new tax regimes is not. Again, however, these setbacks are definitely surmountable. Important industries could be exempted and countries could be required to meet the global minimum tax in the long-run, allowing cyclical variation and differences in regulatory framework. In short, if there’s global political will to make this happen, it can be carried out in a way that only enhances the global economy.
In all, the sounds coming from the Biden Administration on this front are very positive. We shouldn’t underestimate the capacity for international opposition – no doubt corporate lobbyists in every country on earth will oppose this move – but an indication of intent by the most powerful nation on earth is a good first step. Other large economies, including both the EU and the UK, should now express support. Preventing countries from undercutting each other is in everyone’s interest. Ensuring that companies across the globe pay their fair share towards the public services they benefit from is a vital step in building a more prosperous and productive international economy. Biden is pointing us towards a new and better way for countries to work together to build an economy that works for everyone. Now, the world must follow.
Photo source - Flickr (World Bank Photo Collection)