Joe’s Biden’s global minimum corporation tax rate scheme is a dangerous idea
When the G7 leaders assemble in Cornwall between 11 and 13 June for their 47th summit, the agenda will be dominated by global recovery from the Covid pandemic and the ever more strident Climate agenda. But newcomer President Joe Biden is also bringing another issue to the table: proposals for a global minimum corporate tax rate. This is one of those superficially straightforward “big ideas” that, on detailed examination, look more like a ticking time bomb.
There is widespread acknowledgement that large international corporations, turning huge profits while paying derisory amounts in tax, must be brought to fiscal accountability. The billion-dollar question is: how? The Organisation for Economic Co-operation and Development (OECD) has been debating fiscal reform for some time now under two “pillars”, of which pillar 2 covers the global minimum corporate tax rate proposals.
However, the OECD’s calculations have been based on an assumption that the minimum rate would be set at 12.5 per cent, reflecting the Irish rate, which is the lowest. Now, however, Joe Biden and US treasury secretary Janet Yellen have come sprinting off their blocks with a much higher rate proposal. Initially, to avoid frightening the horses (and the Irish), a figure of 15 per cent was being bandied around. Now, however, with the G7 summit looming, it seems the US favours a 21 per cent minimum rate.
With the US set to increase its domestic corporation tax rate to 28 per cent, that proposal probably seems modest to Yellen. But not everybody sees it that way. It “strikes me as… high,” said David Malpass, head of the World Bank. He is concerned that a high minimum rate could affect poor countries’ ability to attract investment. Yellen has revealed her motives by telling US legislators that setting a global minimum tax would allow America to remain competitive, despite the 28 per cent rate the Biden administration is about to impose.
So, it’s about nobbling competitors, to save a spendthrift US government from some of the consequences of its need to squeeze business until the pips squeak, to fund its squandermania. There is no issue on which politicians talk more humbug than on corporate tax. Everyone – absolutely everyone – including the Irish, Maltese, Cypriots et al., is in favour of setting a minimum rate. It’s just that every country wants that rate to equal, or be slightly smaller than, its own current rate.
This issue could provoke even more infighting than most others. The EU, for instance, is a potential big winner from the setting of a minimum rate. According to calculations by the EU Tax Observatory, a 15 per cent rate would give the EU €50bn a year, while a 25 per cent rate would bring in nearly €170bn extra a year. However, any new EU-wide taxes would require unanimous approval by all 27 member states, some of which profit from a low corporate tax rate. A proposed EU tech tax was blocked in 2018 by an alliance of small states. The OECD faces the even bigger challenge of negotiating agreement among 140 countries.
That is the least of it. There are innumerable hurdles to be overcome, especially in American domestic politics, before a minimum tax rate could get off the ground. The principle of federalism is crucial in this. American state governors use tax breaks to attract companies into their state; if the Federal government overruled that, governors would get round the prohibition via devices such as “green” subsidies for corporations. Many OECD states have federal constitutions, so that a centrally imposed minimum rate would trigger constitutional conflict.
How, in fact, would Biden enforce a minimum rate? If he did so by executive order, it would be rescinded on the first day of a Republican presidency. If he tried to sign an international treaty, it would be blocked in the Senate. Is it even worth the grief? Sceptics claim that corporate taxes represent only 10 per cent of federal tax receipts. Hardline free marketeers insist that the money will do more good in the hands of business and investors than in the coffers of governments that seem to have abandoned all fiscal continence.
In fact, if one takes away the desire to punish huge corporations that are becoming more powerful than governments, the case for expanding corporation tax becomes much more problematic. Shorn of virtue signalling, this reform looks like nothing more than a fight between two big beasts: rapacious corporations and spendthrift governments whose extravagance with other people’s money is becoming pathological.
The proposal looks even more of a damp squib if one takes into account the fact that globally the current average rate of corporation tax is 23.79 per cent. Joe Biden, as his first hundred days in office showed, is an old man in a hurry. But a minimum corporate tax rate is not an issue that lends itself to hurrying. A likely outcome is deadlock and the can being kicked down the road. An equally likely outcome is prolonged negotiations, leading eventually to a modest floor of, say, 15 per cent. Not many executives would throw themselves from the top of the Google or Apple buildings on hearing such news.
The purpose would be to lock the maximum number of countries into agreement, then gradually ratchet up the figure. It might or might not work, but how comprehensive its outreach would be is questionable, bearing in mind that 10 countries currently have corporate tax at zero rate. The public will watch this process with sceptical indifference: who would make better use of the large sums of money involved – some huge corporation or some bureaucratic government?
What many observers and politicians are evading is that, while it is all very well to set a minimum tax rate, that is meaningless unless there is common agreement on what is being taxed. Currently, there is not. Governments can be very creative about what is and is not subject to taxation. So can accountants, who must surely sense yet another dripping roast being put on the spit.
American conservatives also advance another argument: that it would be folly to ignore the geopolitical consequences of such a tax agreement. They point out that there must now be factored into every international initiative one actor who does not abide by any rules: China. If, the argument runs, the western world locked itself into a fiscal cage, China could take advantage by offering global corporations irresistible incentives, drawing wealth and its creators away from the United States, Britain, the EU, etc. The extent to which such a ploy would succeed is debatable, but it would be foolish not to take the possibility into consideration.
More domestically and obviously, the Biden administration is following up state intervention, via the minimum wage, with further intervention to curb companies’ earnings and police formerly free market operations. The government makes a moral case which most people recognize as having some validity; yet the underlying reality is that the state is making a further advance into the market environment and doing so on a global scale.
In corollary, some governments would themselves be curbed by what amounts to an international fiscal cartel, eroding their sovereignty. Nobody feels sympathy for fat-cat corporations clinging onto inflated profits, but that knee-jerk reaction should not obscure the many complex issues concealed within this simplistic morality tale.