It is ironic that rich countries are pushing policies that disadvantage the poor. However, this was exactly what world leaders did. They endorsed a minimum global tax rate of 15% for large corporations. This deal gained momentum with pledges from leaders across 136 countries.
These are the deal’s basic objectives. The deal creates a tax cartel. High-tax countries believe that this will reduce competition from lower-tax countries. This also helps wealthier countries with higher taxes by shifting revenue from the countries in which companies are located to those where they make their sales. These two goals are centered on the necessity to support wealthy countries’ huge budgets.
Let’s get the facts straight about a global minimum income tax. Since 2017, most countries including the United States have used some form of a territorial system. Territoriality, a fundamental principle in good tax policy, means that taxpayers don’t have to pay tax on their foreign-earned incomes. This money is instead subject to tax in foreign countries where it has been earned. Companies can decide where they will do business by choosing the country with the most favorable tax system. This makes it more difficult for governments to relax their harsh tax systems.
The competition from high-tax nations isn’t what they want. This is why the U.S. has been keen to abolish it by imposing a global minimum income tax. While the U.S. government stands to gain tremendously from this new regime, U.S. corporations with income and foreign subsidiaries will not.
Interesting thing about advocates is the simple fact that many of them are simply looking to increase revenue for businesses. A recent article in The Washington PostLawrence Summers (ex-Treasury Secretary) cheered the deal.
The countries have joined forces to ensure that global prosperity can be shared, not just lower taxes for the wealthy. The new minimum tax provides a stronger revenue source and will pay for public investments essential to the economic growth of all countries.
Summers believes that raising tax rates will inevitably result in more revenue and that the politicians will use that money to support growth. The belief that politicians will invest in worthy projects is more important than the belief that they can introduce economic distortions, buy votes or provide corporate welfare. This faith, as shown by the “Build back Better” legislation that is currently in Congress and loaded with antiproductive tax credits, is not justified.
Additionally, research from the Tax Foundation, International Monetary Fund and Organisation for Economic Co-operation and Development shows that raising the corporate income tax rate is not an effective way to increase revenues and will result in a decrease of gross domestic product. This is partly due to the fact that it reduces investments, lowers worker wages, and causes an increase in consumer prices.
While corporations might not be the most popular of companies, we can expect too much from them in terms of raises for American workers. Is there a way to control the cost of their products? Companies need accountable governments, including options for when taxes get too severe.
Ironically, though the United States and their richest friends will benefit at the expense the poorer countries, it is actually being done in the name to fight inequality. Summers says it is for “lower taxes burdens for the wealthy”.
The wealthy could cut their spending in order to solve their budget woes. That’s something many politicians aren’t able to stomach. They could even change transfer-pricing regulations if there is a problem in the tax system for multinational corporations. They shouldn’t tell countries outside their borders how to tax income, or even create a global tax cartel.
This development may not be of concern to the average taxpayer. Be aware that this cartel is only the beginning. It’s just a matter time until revenue-hungry legislators increase the minimum tax rate for individuals once such a system has been in place.
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