Governments should tax cash flow, not global corporate revenues

The author is a professor of economics and finance at Columbia University and previously chaired the US Council of Economic Advisers.

US Secretary of the Treasury Ethan Yellen has advocated for a global minimum tax on corporations since the Biden administration was formed. While the United States backed away from a 21 percent interest rate (which was aimed at raising the current US corporate tax rate from 21 percent to 25 to 28 percent), it closed with a G7 finance minister of at least 15 percent. Secretary Yellen praised that step. “This global minimum tax will put an end to the corporate tax race. It would provide justice for the middle class, working people in the United States and around the world.”

It is difficult to argue that corporate income should not pay its “fair share”. But the global minimum tax raises both political and economic issues.

Politics first. Confirmation in the US will probably be tough. The minimum tax is estimated by the EC EC to raise $ 50-80 billion a year, mostly from successful American companies. Revenue from the US Treasury will be part of that amount, but small compared to the significant increase in spending proposed by the Biden administration. Will other governments direct their political spending to a deal that could be temporary if it fails to get US legislation approved? Even if the deal succeeds, can it’s a competitive victory for China? As a supporter of the G7 or EC EC proposals, can it use “tax rates” and “subsidies” to invest more in China?

But it is on economics that the global minimum tax raises more sensitive issues in both areas. The first is the formation of a tax base. The second concerns the fundamental question of what problem policymakers are trying to address: is a new minimum tax the best way to do it?

15 percent rate: especially not useful without agreeing on what is appropriate basis: Particularly for the United States, where many lucrative technology companies live, there should be concern that countries will use special taxes and subsidies that are effectively targeted at certain industries. The United States has had a version of the minimum foreign income tax, as the 2017 tax cuts and jobs law enshrined in the GILTI (Global Intangible Low Taxable Income) provision. The Biden administration wants to use the new global minimum tax to raise the GILTI interest rate, expand the tax base, eliminate the GILTI reduction for foreign investment in equipment.

For a minimum rate of 15 percent to make sense, countries need a common tax base. Presumably, the purpose of the new minimum tax is to limit the right of companies to transfer profits to lower taxes, rather than to distort where those companies are investing. Combining the global minimum tax with the broad base protected by the Biden administration can reduce cross-border investment and reduce the profitability of large multinational corporations.

An even deeper economic problem is who bears the tax burden. I mentioned above that the projected revenue growth is small compared to the level of G7 government spending. It is not the corporations that will pay more, but the owners of the capital, mainly the employees, according to modern economic views, who bears the tax burden.

Is there a better way to achieve what Ellen, her finance minister colleagues, are trying to accomplish? Let’s start with the fact that countries can afford full investment costs. This approach would shift the tax system from a corporate income tax to a cash flow tax that economists have long preferred. In this review, the minimum tax will not distort new investment decisions. It will also lead to economic rents on the tax burden, a profit that exceeds the normal return on equity, better meeting the G7’s obvious goal of raising more revenue from more profitable large companies. And such a system will be simpler to manage, as multinational companies will not have to create different ways to recoup investment costs that are stored over time in different countries.

In the debate that preceded the US tax legislation of 2017. For the changes, Congress considered this idea a hypothesis Destination-based cash flow tax“Like VAT, this will also tax corporate profits based on cash flows in the country.” Reform based on the political desirability of border adjustments reduces tax bias on investment and promotes tax justice.

Returning to the numbers. Countries with high government spending relative to GDP, as the Biden administration suggests, are financed mainly by value-added taxes rather than traditional corporate income taxes. A better global tax system is possible, but it starts with a “no GILTI” ruling.

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