Leave the global minimum control grip behind

World leaders last year announced with much fanfare a new global minimum tax on corporations. On March 14, the Organization for Economic Co-operation and Development published guidance on implementation. The guide’s distorted language and political digging in several countries make it clear that the hyped global tax plan would be a big and expensive flop. Better to let this hydra-headed monster die.

The agreement was always a tax robbery. Aside from the rhetoric about helping poor countries and ensuring fairness, Europe wanted to increase revenue by taxing US companies. The Biden administration has hailed the deal along with well-known claims that big companies should “pay their fair share.” Treasury Secretary Janet Yellen promised it would swell America’s coffers to “pay for infrastructure, childcare and clean energy.” Both cannot be true. The Europeans and some opportunistic Third World governments would gain revenue at the expense of the US

The deal would redistribute an estimated $125 billion in annual corporate taxes paid by the largest companies — essentially the global Fortune 500 — based on where their customers are located rather than their employees or offices. Digital multinationals like Amazon,

Google, Airbnb and Meta are the target. Financial services and extractive industries are excluded as they operate largely on a local basis and generally tax profits where they are made.

The more controversial and much larger part of the agreement, known as the backstop, aims to introduce a global minimum tax rate of 15% for international companies with annual sales of more than €750 million (about US$840 million). The backstop would drain revenue from the US, which offers tax credits and subsidies for everything from research and development to greenfield investments. Once all countries adopt the new rules and make strategic decisions in anticipation of the behavior of others, the net result, according to the model used by the bipartisan tax foundation, would be a $44 billion fall in federal revenue over 10 years.

The only plausible way the tax will lead to more revenue for the US is if it’s used as a cover for raising corporate taxes here, which is perhaps why the Biden administration joined. “We are increasingly concerned that the Treasury Department has negotiated a deal that will hurt U.S. businesses and jobs,” Republican members of the Senate Finance Committee wrote to Ms. Yellen in February. Aside from the small question of stripping Congress of its constitutional control over taxation, the deal would also undermine Democrats’ ability to use the tax bill to promote research, renewable energy and low-income housing.

The Republicans on the Finance Committee are also right on the economic front. Corporate taxes are not only expensive to collect, they are also bad for the economy. According to a study by the International Monetary Fund, 45% to 75% of the corporate tax burden is recouped through lower wages for workers. Sales, income, and wealth taxes are better means of payment for governments because they are easier to collect and cause fewer distortions in wealth-creating economic decisions.

It gets worse. Public companies are already required to keep two books, one for the Securities and Exchange Commission and one for the Internal Revenue Service. The first tells shareholders how well the business is doing; the second tells the government how much is owed and to whom. The new global tax would oblige multinationals to keep a third book to avoid being targeted by tax raids, say, France. The agreement would create many new jobs for accountants and lawyers. It would also force big companies to become think tanks when they look for consumer spending statistics to estimate final sales at every place their products are sold.

State tax departments would have to grow to interpret and manage the complex new rules. Some countries would certainly find ways to rig the system to get more than their share of the revenue. The rules would make some small-country governments little more than tax piracy, spending time examining possible angles of attack on large corporations.

Others would simply impose minimum corporate taxes on foreign investors and then find other ways to reward them for not leaving the company. The United Arab Emirates announced earlier this year that it would levy a 9% tax rate on corporate profits in 2023, but the rate would rise to 15% for all companies that fall under the global minimum tax. The UAE could easily offset the tax burden by offering economy-wide cuts in the cost of doing business such as cheap land and utilities. China would no doubt say that it fully taxes its companies while hiding a variety of incentives behind its opaque system.

Like the Byzantine rules the Obama administration imposed on finances after the 2007-08 global financial crisis, the plan is halfway too smart, failing to account for administrative burdens, unintended consequences, or changing business conditions. Poorer countries that use tax breaks to attract multinationals would get the worst of it. A study by the IMF touted the benefits for low-tax countries like Ireland, arguing that they could raise taxes without losing revenue. But the same benefits would not accrue to poor, low-tax countries. An analysis by the Oxford University Center for Business argued that the rules would trigger an even faster race to the bottom as some poor countries seek to offset the negative impact of the tax rules by slashing corporate tax rates to zero.

The deal requires governments to legislate for the new regime this year and implement it in 2023. But some countries, like Switzerland, say they can’t implement it before 2024. “It is becoming increasingly clear that it will be years before China and most European countries introduce a foreign minimum tax, and some may never do so,” a group of 45 US multinationals wrote to Ms Yellen in February.

The global minimum tax is a solution in search of a problem. Most countries, including the US, already have national laws to handle digital sales and profit shifting to low-tax jurisdictions. The Biden administration would struggle to implement the deal if Republicans gain control of Congress in November. Better to scrap the whole thing and return to piecemeal and context-sensitive solutions to the problem of taxation in a digital and global world.

Mr. Gilley is Professor of Political Science at Portland State University.

Wonderland (06/16/21): Emmanuel Macron welcomed Joe Biden to the “club.” He spoke about the European welfare state. Image: Kevin Lamarque/Reuters

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Ethan Gach

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