In October 2021, the political leaders of 137 countries agreed to a minimum tax rate of 15 percent on the profits of large multinationals, working through the OECD. Since then, the momentum has stalled.
There are some legitimate technical questions about how the 15 percent minimum would operate in practice. The proposed global minimum tax would limit artificial profit-shifting by multinationals from high- to low-tax jurisdictions by eliminating tax havens entirely. But the 15 percent rate is not high enough to end profit-shifting, since that rate is significantly below the OECD average corporate rate.
Another concern is the fact that refundable credits are exempt from the calculation of the effective minimum tax rate. That means that a country can convert any tax credits to cash subsidies and thereby enable multinationals to operate within it and pay no tax.
These aspects of the global minimum tax are the kind of political compromises that were necessary to get 137 countries on board. Even so, if the overall result of the project is to compel multinationals to pay some tax regardless of their accounting gimmicks, the effort is still worthwhile and the loopholes can be closed over time.
However, there is a deeper critique of the global minimum tax, which is that the corporate tax itself is not necessary. If the purpose of the corporate tax is to indirectly tax the rich, that purpose can more easily be achieved by subjecting shareholders to personal taxation based on the value of their corporate shares. This is the proposal advanced by Sen. Ron Wyden (D-OR), the chair of the Senate Finance Committee.
If it were adopted, the entire corporate tax could be repealed. And if the corporate tax is repealed, then the global minimum tax with all its complexity is superfluous.
But even if we can make up the revenue in other ways, we still need the corporate tax as an important regulatory device. Publicly traded corporations that are subject to the corporate tax are crucial players in the economy. Among OECD economies, business activity—the value added from businesses of any size or formality including corporations, partnerships, and sole proprietorships—accounts for 72 percent of GDP. In the U.S., large corporations (that are subject to the corporate tax) account for about 25 percent of GDP.
Governments can regulate businesses directly. But given the limits of information available to the government, it is frequently preferable to use indirect means of regulation, such as taxation. For example, if the government wants to incentivize corporations to increase investment or hire more people, giving them tax incentives to do so (and letting them decide on the precise amount of increased investment or payroll) is more effective that telling them how much to invest or to hire.
But for such incentives to be effective, they must be offered against the background of a robust corporate tax. There is no point in granting corporations the right to currently deduct equipment purchases (as current law allows) or give them investment or payroll tax credits if the corporate tax rate is zero.
The proposed global minimum tax would limit artificial profit-shifting by multinationals from high- to low-tax jurisdictions by eliminating tax havens entirely.
And this brings us back to the global minimum tax. Before 2017, the effective tax rate of U.S. multinationals on their offshore income was close to zero. As a result, the effectiveness of many domestic tax expenditures (like the pre-2017 deduction for domestic manufacturing) was minimal because the multinationals benefited more from shifting profits offshore.
The enactment of the Global Intangible Low-Taxed Income (GILTI) minimum tax at 10.5 percent in 2017 changed this calculus. Since offshore income was now subject to tax at 10.5 percent (or 13.125 percent after foreign tax credits), the government could effectively offer a domestic tax incentive like the Foreign-Derived Intangible Income (FDII) provision, which reduces the tax rate on exports from 21 percent to 13.125 percent and is intended to be a mirror image of GILTI. In the absence of GILTI, FDII would not work, because the multinationals would prefer to shift income from export operations offshore, where it would (without GILTI) be subject to zero taxation.
So the global minimum tax is not just about curbing profit-shifting or tax competition. It is about preserving the entire corporate tax and its ability to regulate corporate behavior by ensuring that no corporate income (domestic or foreign) is subject to zero taxation. The current corporate tax brought in $370 billion in FY2021. According to the Joint Committee on Taxation, the global minimum tax would bring in an additional $200 billion over a decade, or an additional $20 billion per year.
Of course, it would be preferable to set the global minimum tax rate at the OECD average (23 percent, or 25 percent if weighted by GDP) rather than 15 percent. A higher rate would mean that the domestic tax incentives are even more effective because at 15 percent it may still be better to shift profits offshore if the domestic tax incentive only reduces the tax on domestic income from (for example) 21 percent to 16 percent. But 15 percent is what could be achieved politically, and it is much better than the pre-2017 rate on offshore income, which was close to zero.
Finally, since the U.S. already has the GILTI minimum tax, why does it need the global tax deal? If GILTI were a true minimum tax, then perhaps it would not, although it would still be nice to eliminate the spurious Republican argument that taxing foreign income harms the competitiveness of U.S. multinationals, since the global deal ensures that all multinationals are subject to the same 15 percent rate on foreign income. (This argument is spurious because U.S. multinationals are doing perfectly fine under GILTI, even though multinationals from other countries are not currently subject to any minimum tax.)
But the current GILTI tax is fatally flawed. First, the rate is too low—at half the domestic rate, there is still too much incentive to shift income offshore, thereby limiting the effectiveness of any domestic tax incentives. Second, because GILTI allows averaging between countries, any U.S. multinational that is already invested in a country with a rate higher than 10.5 percent (which is most large countries in the world) has an incentive to invest in a zero-tax country to bring its average foreign tax rate to 10.5 percent and thereby avoid paying any GILTI tax. Third, since GILTI does not apply to a deemed 10 percent return on tangible assets, it creates an incentive to shift real investment and jobs offshore.
For all these reasons, GILTI is not an effective minimum tax. That’s why the U.S. Congress needs to accept the global tax deal the Biden administration committed to last October and enact legislation that raises the GILTI rate to 15 percent, eliminates averaging, and limits the incentive to shift profits to zero-tax jurisdictions overseas.
That is precisely what the Biden administration has proposed and passed through the House. All Democrats in the Senate (even Sen. Manchin) are on board. The legislation should be passed as soon as possible, before a potential Republican takeover of the House makes enacting it impossible.
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