Yellen pushes for a global minimum tax rate to create ‘a more level playing field’

Higher corporate taxes are a key part of paying for President Joe Biden’s $ 2 trillion infrastructure package. To prevent US multinational companies from being at a competitive disadvantage, the administration is pushing for other countries to commit to a tax floor.

In a speech to the Council on Global Affairs in Chicago on Monday, Treasury Secretary Janet Yellen announced a return to multilateralism after four years of diplomatic and economic isolationism. “America First should never mean America alone,” Yellen said.

“This is an area in which the United States is now trying to exert some leadership,” said Eric Toder, an institute fellow at the Urban-Brookings Center for Fiscal Policy.

Yellen called on other nations to support the initiative, saying the United States is working with other G20 nations to develop and implement a global minimum tax, which he said would “stop the race to the bottom” and foster more equitable economic growth between countries. and regions.

“Together we can use a global minimum tax to ensure that the global economy thrives on a more level playing field in the taxation of multinational corporations and spurs innovation, growth and prosperity,” he said.

Biden’s plan calls for a 28 percent corporate tax rate, effectively dividing the difference between the 21 percent rate enacted in the law in 2017 and the 35 percent that had been before the GOP tax cuts, and double the current offshore tax rate of 10.5. percent.

The president dismissed the idea that raising corporate tax rates would hamper America’s economic recovery, telling reporters at the White House on Monday that “there is no evidence of that.”

Policy watchers say a global minimum tax would be a boon to Biden’s domestic corporate tax ambitions: If all companies, not just US-based multinationals, were assessed at the same tax rate no matter what. part of the world recorded their profits, American companies would have. little reason to set up front office offices in places with little business but low tax rates.

“The discussion of this now also suggests that they are concerned about capital flight if they increase corporate taxes for the infrastructure bill,” said Michael O. Moore, professor of economics and international affairs at George Washington University.

“Businesses are multinational these days and the idea of ​​corporate residency has little economic significance,” Toder said. Although it is now a thorny question for businesses ranging from social media platforms to drug manufacturers, the question of locating or relocating a business for the purpose of tax avoidance has come up recently.

“The problem has gotten a lot worse in the last 20 to 25 years. The nature of business has changed and become more global, and much more of the added value is in intellectual property as opposed to factories, ”said Toder. Computer code, chemical formulas, and the like are portable assets in the way that cars or jet engines are not.

Secretary Yellen has the advantage of being known and highly regarded by her peers on the global economic stage, and her words carry weight, said Tom Martin, senior portfolio manager at Globalt Investments. “Overall, Janet Yellen has an excellent reputation as a thoughtful and sophisticated participant in the global marketplace. It is difficult to take away the seriousness that she brings, ”he said.

But even she will go to great lengths to persuade a multinational consortium to agree in principle, let alone negotiate details like an actual global tax rate, which was not addressed on Monday. Achieving compliance could be a significant challenge, some said. “The incentives for a government to fail to deliver on the promise of a minimum corporate tax will be overwhelming,” Moore said.

“Countries that decide to attract ‘desirable’ companies or activities will find a way to avoid the global minimum with tax credits [or] special deductions, ”said Gary Hufbauer, nonresident principal investigator at the Peterson Institute for International Economics. “China will not pay attention to the OECD global minimum. Neither does Russia and many other countries. “

The administration is also likely to face resistance at home to any plan to generate revenue by increasing corporate taxes, and Republican lawmakers have already spoken out against Biden’s proposal to fund his infrastructure plan.

In theory, an international tax with independent application of borders would be an equalizer between companies, but it is an open question whether or not CEOs will want to trade the certainty of a fixed tax rate for the opportunity to obtain more profits. “As long as it affects everyone equally, then it is not an event from a competitive standpoint,” Martin said.

“If you tax only American companies on their worldwide income, you really put them at a disadvantage,” Toder said. “If Biden tries to tax American companies and other countries don’t follow it, it’s a recipe for failure.”

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