Governments should tax cash flow, not global corporate income

The writer is a professor of economics and finance at Columbia University and previously chaired the U.S. Council of Economic Advisers

Since the inception of the Biden administration, U.S. Treasury Secretary Janet Yellen has advocated for a minimum global tax on corporations. While the U.S. was backtracking from a 21 percent rate cut (it was linked to the goal of raising the current U.S. corporate tax rate to between 21% and 25%), it was tied to G7 finance ministers. at least a 15 percent rate. Secretary Yellen praised the move: “This minimum global tax would end the final race in corporate taxation and ensure fairness for the middle class and workers in the U.S. and around the world.”

It’s hard to argue that corporate income shouldn’t be paid for its “right share”. But the global minimum tax raises political and economic questions.

Politics first. U.S. approval is likely to be tough. The OECD estimates that the minimum tax will be between $ 50 billion and $ 80 billion a year, a large part of successful U.S. companies. U.S. treasury revenues would be part of that amount, but small compared to the significant expansion of spending proposed by the Biden administration. Will other governments bear their political costs if they do not get US legislative approval to reach an agreement that could be transitory? If the deal is successful, would it give China a competitive victory? As it is not a party to the G7 or OECD proposals, could it not use tax rates and subsidies to attract more investment to China?

But economically, the global minimum tax raises more sensitive questions in both areas. The first is the design of the tax base. The second deals with the key question of the issue they are trying to address and whether the new minimum tax is the best way to do so.

15 percent rate it is not particularly useful without an agreement on that tax base yes. Especially in the US, where many highly profitable technology companies live, there should be concern that countries will use special taxes and subsidies that effectively run certain industries. The US has had a version of the minimum tax on foreign profits since the 2017 Tax Cuts and Labor Act introduced the GILTI (Global Immaterial Low-Taxed Income) provision into law. The Biden administration wants to use the new global minimum tax to raise the GILTI rate and expand the tax base by eliminating the GILTI deduction for foreign investment in facilities and equipment.

For a minimum rate of 15 percent to make sense, countries would need a uniform tax base. Supposedly, the goal of the new minimum tax is to shift profits to low-tax jurisdictions to limit the benefits that companies have, and not to distort the place that these companies invest. Combining a global minimum tax with the broad base advocated by the Biden administration could reduce cross-border investment and reduce the profitability of large multinational corporations.

The one who bears the tax burden is the deeper economic problem. I noted above that the projected revenue increases are small compared to the G7 government spending levels. It is not the corporations that would pay more, but the owners and employees of the capital, according to the contemporary economic views of those who bear the burden of the tax.

There is a better way to get Yellen and his finance minister colleagues to try to carry them out. For starters, countries can afford to spend their entire investment. This approach would move the tax system away from corporate income tax to cash flow tax, which has long been backed by economists. In this review, the minimum tax would not distort new investment decisions. It would also push the tax burden on economic rents – profits above the ordinary return on capital – which is an apparent G7 goal that better satisfies the goal of making more profitable returns for large companies. And this system would be easier to administer, as multinationals will not have to establish different ways to track deductible investment costs in different countries.

In a previous debate on changes to the 2017 U.S. tax law, Congress considered a version of the idea a tax on cash flows based on the destination. Like value-added tax, this would tax corporate profits based on cash flows in a particular country. Reforms based on the political appropriateness of border adjustments limit investment tax biases and promote tax fairness.

Returning to the numbers: As proposed by the Biden administration, countries with high public spending compared to gross domestic product are mainly financed by value-added taxes, not by traditional corporate income taxes. A better global tax system is possible, but it starts with the “no GILTI” ruling.