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Opinion: Why Janet Yellen is wrong on corporate tax rates

Some economists argue that a tax hike on multinational corporations could be just the cure. Joseph Stiglitz of Columbia University and other economists recently penned an open letter to President Biden saying the United States must support “a global minimum tax on multinationals,” which would establish a floor for how low countries could set their corporate income tax rates. This would put “an end to harmful tax competition between countries” and reduce “the incentive for multinationals to shift profits to tax havens,” they argued.
These economists have found backing from Treasury Secretary Janet Yellen who has said nations that lower their corporate tax rates are embarking on a destructive “race to the bottom.”

But imposing a global minimum tax on the world’s corporations would significantly curb countries’ autonomy in using tax policy to stimulate investment, while also setting a ceiling for global productivity and the speed at which we can recover from today’s pandemic-driven downturn.

As talks between policymakers and governments at the Organisation for Economic Cooperation and Development (OECD) — where over 130 countries are negotiating changes to international tax rules — continue, leaders must ask whether this is an appropriate response to a world trying to restart its engine.

The answer? Yellen and Stiglitz have it backwards. Most countries aren’t racing to the bottom, they’re racing to the middle. Tax Foundation research shows that, for the past decade, the worldwide average of corporate tax rates has plateaued in the mid-20% range. Moreover, the OECD has found that the corporate income tax is the most harmful tax for economic growth. Keeping tax rates competitive will help economies rebuild faster and stronger.
After 30 years with one of the highest corporate tax rates in the developed world, the United States sharply reduced the federal corporate tax rate to 21% from 35% in 2017. But the Tax Cuts and Jobs Act didn’t start the race to zero; it simply brought our corporate tax more in line with that of our competitors, making the United States a more attractive place for business.

Supporters of a new global minimum tax point out that it’s a way to level the playing field, but it’s an excuse for the countries at the OECD to pick who wins and who loses new business as the world rebuilds. Imagine if the big tech companies decided to level the playing field with “minimum prices” that froze out lower-priced competition. Consumers would be the losers because companies would no longer be able to compete to produce good products cheaply, just as taxpayers would be the losers if governments set a global minimum tax. Competition is good in business and in tax policy.

A new global minimum tax and rewriting of other international tax rules would not impact each country equally. High-tax countries, like France, where their corporate rate is currently 28.4%, would stand to gain from this policy, while places like Ireland and the United States, which have lower, more competitive rates and are home to more large multinational companies, especially those earning high profits, would face larger tax hikes that could motivate companies to leave.

If one goal of the current OECD negotiations and Secretary Yellen is to raise new revenues to help address the global pandemic, a policy that redistributes revenues from one country to another and relies on increasing the tax burden on investment does not seem to fit the task.

Not to mention, the United States already has its own version of a minimum tax. The Global Intangible Low Tax Income (GILTI), enacted as part of the 2017 tax cuts, operates as a minimum tax on profits of US multinationals. Expanding that policy on a global scale will only burden the very businesses that stand to help the United States and the rest of the world rebuild.

One rationale behind a new global minimum tax is to stop tax avoidance — or what is known as “anti-base erosion.” The United States worked to address this issue in the 2017 tax cuts by lowering the corporate tax rate and adopting rules like GILTI. While the approach wasn’t perfect, it was progress in stopping base erosion. Companies brought revenues parked overseas back to the States, but the reform failed in making the tax code simpler.

These policies designed to enforce tax collection are burdensome and complex, throwing sand in the gears of cross-border investment by making it more expensive for businesses to expand and run global operations because they would face higher taxes. As talks at the OECD continue, leaders must ask whether this is an appropriate response to a world trying to restart its engine.

Last year tested the world’s mettle and proved its resilience. But it also revealed fragilities within our economies. If countries want to promote competitiveness, we should do everything we can to encourage that, so we can all rebuild more quickly. The desire of leaders like Yellen and others across the world to set a new global minimum tax runs the risk of starting a different and much more harmful “race to the bottom” — slower economic growth.

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