In the past few decades, the United States and other countries have been generally reducing tax rates to attract business investment. Some economists believe that this trend is destructive “bottom-up competition”. On the 5th local time, U.S. Treasury Secretary John Yellen called on all countries to jointly set the world’s lowest corporate tax rate to end “30 years of bottom-up competition” at an event hosted by the Chicago Global Affairs Committee.
“We can jointly use the global minimum tax to ensure that the global economy thrives on the basis of a more level playing field for taxing multinational companies, and stimulate innovation, growth and prosperity,” Yellen said. Biden’s government will seek to work with G20 members to set a global minimum corporate tax rate to end this situation.
Bottom to bottom competition, that is, some countries try to attract multinational companies by reducing tax rates, so as to surpass each other’s taxes. Over the past 40 years, the world’s industrialized countries have slashed corporate taxes. Multinational companies are increasingly depositing their profits in tax havens overseas, although there is little real economic activity there.
Since the former US President Trump’s tax reform in 2017, which greatly reduced the corporate tax rate from 35% to 21%, the competition has intensified. Last year alone, nine countries around the world, including France, reduced their corporate tax rates.
According to the data of tax fund, a think tank in the United States, the global average corporate tax rate was about 40% in 1980 and has dropped to about 23% by 2020. Zuckerman, an economist at the University of California, Berkeley, and others pointed out that about 40% (more than $700 billion) of the profits made by global multinationals in 2017 were hidden in tax havens.
In the eyes of Joseph Stiglitz, Yellen’s mentor and Nobel Laureate in economics, this is like a tax version of the Paris climate agreement. Every country thinks that it can “steal” the business of other countries through tax cuts, and the only beneficiaries of this bottom-up competition are the richest multinational companies.
Now, though, it may be over. An official said that the United States will use its own tax legislation to prevent companies from transferring profits to tax havens, and will encourage other major economies to do the same. The former tax havens may be under pressure in the future.
In addition to long-term tax considerations, Yellen’s move may also have something to do with Biden’s tax increase. Biden just announced a $2 trillion infrastructure plan last week, and tax increases are likely to be part of the funding for the bill.
Ramamuti, deputy director of the National Economic Commission, said in an interview that Biden plans to impose higher tax rates on big companies and the rich. “The key is that the president firmly believes that large businesses and people who have made a lot of money in the past few decades should pay more.”
According to Biden’s proposal, the federal corporate income tax rate will be raised from the current 21% to 28%, and the minimum tax rate for us enterprises’ overseas profits will be raised from 10.5% to 21%, so as to limit us enterprises’ overseas tax avoidance and encourage them to expand investment in the United States.
As soon as the move was made, tax experts, business groups and Republican lawmakers worried that the tax increase would damage the competitiveness of the United States. Now setting the world’s lowest corporate tax rate may offset some of the negative effects of the US tax increase.
Tax experts pointed out that without the global minimum tax rate, the tax rate of the United States would again be higher than that of some other major economies, and the proposal of the United States might help to promote the negotiation of tax treaties between the major economies.
According to Yang Shuiqing, an assistant researcher at the American Research Institute of the Chinese Academy of Social Sciences, Yellen’s proposal is closely related to Biden’s tax increase policy. If the minimum tax rate is no longer applied, domestic investment in the United States will lose its competitive advantage, and enterprises will certainly try their best to avoid tax. If these countries reach a unified minimum tax rate, they will be able to retain the current enterprises or attract foreign enterprises.
Yang Shuiqing went on to point out that it is important to get the major global economies to agree to the plan and make it effective. As for how to achieve it, it still depends on Yellen’s practice and the determination of the US government.
In fact, Yellen has been working hard for this plan. During the campaign, she said that if the nomination was confirmed, she would “work with allies to build a global tax system to protect the competitiveness of the United States, while ensuring that businesses pay a fair share.”. In his first few weeks in office, Yellen discussed tax negotiations with a number of finance ministers, including German and French finance ministers, the Treasury said.
However, Yellen’s efforts also met with many doubts. They worry that the move will encourage multinationals to further transfer taxes to countries outside the agreement, or encourage the United States to make compromises that undermine its competitiveness.
More people are worried about the formation of this plan. Analysts pointed out that if the world’s major economies do not reach an agreement on setting a minimum corporate tax rate, Biden’s tax reform proposal will put U.S. multinational enterprises at a disadvantage in competition with multinational enterprises in other economies.
Beijing Business Daily reporter Tao Feng Zhao Tianshu
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