U.S. Treasury Secretary Janet Yellen and the financial leaders of the other G7 nations (Canada, the United Kingdom, France, Germany, Italy, and Japan) recently agreed to a minimum corporate tax rate of 15 percent, and they are currently working to convince holdouts in the G20 nations to join the agreement.1
According to current proposals, the global minimum corporate tax will require multinational companies with headquarters in any of the nations in the agreement to pay at least the minimum rate, no matter where their products and services are sold.2 For example, suppose a company headquartered in a participating country, such as the United States, is reporting sales in a country that is not participating, such as Barbados. Barbados currently has a corporate tax rate of 5.5 percent; if the United States agrees to a global minimum tax rate of 15 percent, the U.S. government would collect 9.5 percent of the company’s taxable income, “topping up” the company’s taxes to the minimum rate.3
The stated purpose of the minimum tax is to remove incentives for companies to relocate and avoid high taxes in their home countries. In Yellen’s words, developed nations must “end the pressures of tax competition and corporate tax base erosion,” which pose problems for leaders such as President Biden and French President Emmanuel Macron, whose policies and proposals include large schemes to be financed by taxpayers.4 Thus, the arguments in favor of corporate taxes mostly revolve around the narrative that large companies need to “pay their fair share” toward these programs. This is why Yellen insists we must end the "global corporate tax race to the bottom” by imposing a tax floor.5
However, Yellen and other politicians in favor of a global minimum tax ignore crucial truths, including moral and economic factors. Let’s consider the economic effects first. . . .
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1. These include the G7 countries plus Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, and the twenty-seven member states of the European Union; Leigh Thomas and David Lawder, “Explainer: What Is a Global Minimum Tax and What Will It Mean?,” Reuters, June 7, 2021, https://www.reuters.com/business/finance/what-is-global-minimum-tax-what-will-it-mean-2021-06-05/; Alan Rappeport, “Finance Ministers Meet in Venice to Finalize Global Tax Agreement,” New York Times, July 10, 2021, https://www.nytimes.com/2021/07/09/business/g20-global-minimum-tax.html.
2. Richard Partington, “G7 Tax Reform: What Has Been Agreed and Which Companies Will It Affect?,” The Guardian, June 7, 2021, https://www.theguardian.com/world/2021/jun/07/g7-tax-reform-what-has-been-agreed-and-which-companies-will-it-affect.
3. The taxable income is the company’s foreign sales revenue, minus a predefined deduction for “the carrying value of tangible assets and payroll.” See Laura Davison and Isabel Gottlieb, “Plans for a Global Minimum Tax Revolution, Explained,” Bloomberg News, April 8, 2021, https://www.bloomberg.com/news/articles/2021-04-08/plans-for-a-bigger-pie-of-global-taxes-sliced-fairly-quicktake; “Barbados Corporate Tax Rate,” Trading Economics, accessed July 12, 2021, https://tradingeconomics.com/barbados/corporate-tax-rate; “Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy,” Organization for Economic Cooperation and Development, July 1, 2021, https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-july-2021.pdf.
4. Dominic Rushe, “Janet Yellen Calls for Global Minimum Corporate Tax Rate,” The Guardian, April 5, 2021, https://www.theguardian.com/business/2021/apr/05/janet-yellen-global-minimum-corporate-tax-rate; Tami Luhby, Katie Lobosco, and Kate Sullivan, “Here’s What’s in Biden’s Infrastructure Proposal,” CNN Politics, April 21, 2021, https://edition.cnn.com/2021/03/31/politics/infrastructure-proposal-biden-explainer/index.html.
5. Jeff Cox, "Yellen Says U.S. Pushing to End Global 'Race to the Bottom' on Corporate Taxes," CNBC, May 4, 2021, https://www.cnbc.com/2021/05/04/yellen-us-pushing-to-end-race-to-the-bottom-on-corporate-taxes.html.
6. William McBride, “What Is the Evidence on Taxes and Growth?,” Tax Foundation Special Report, December 18, 2012, https://taxfoundation.org/what-evidence-taxes-and-growth.
7. Åsa Johansson, Christopher Heady, Jens Arnold, Bert Brys, and Laura Vartia, “Tax and Economic Growth,” OECD Economics Department, July 11, 2008, https://www.oecd.org/tax/tax-policy/41000592.pdf.
8. Eric Ohrn, “The Effect of Corporate Taxation on Investment and Financial Policy: Evidence from the DPAD,” American Economic Journal: Economic Policy 10, no. 2 (May 2018), https://www.aeaweb.org/articles?id=10.1257/pol.20150378.
9. Elke Asen, “2021 Corporate Income Tax Rates in Europe,” Tax Foundation, April 8, 2021, https://taxfoundation.org/2021-corporate-tax-rates-in-europe/.
10. Faisal Islam, “G7: Rich Nations Back Deal to Tax Multinationals,” BBC News, June 5, 2021, https://www.bbc.com/news/world-57368247.
11. Rappeport, “Finance Ministers Meet in Venice to Finalize Global Tax Agreement.”