President Biden is rallying G7 nations to set a “global minimum tax” of 15% on corporations.
The G7 — an informal “Group of Seven” wealthy nations consisting of Germany, Italy, the United Kingdom, France, Japan, Canada, and the United States — is meeting on Friday for the first time since President Biden assumed office. In addition to climate change and the rise of China, world leaders will discuss an international 15% floor on corporate taxes.
According to a June 11 statement from the White House:
G7 leaders will endorse a strong global minimum tax of at least 15 percent. This U.S. priority is a critical step towards ending the decades-long race to the bottom that pushes nations to compete over who can offer the lowest tax rate to large corporations at the expense of protecting workers, investing in infrastructure, and growing the middle class.
Experts, however, have pointed out several issues with the proposal.
On one hand, if the G7 forces smaller nations to implement the 15% tax floor, the policy would contradict the White House’s stated goal of “a global recovery that benefits the middle class and working families at home and around the world.”
In the global marketplace, developing nations are at a number of disadvantages against advanced economies. For one, most developing countries do not boast enduring commitments to the rule of law, property rights, and the independent judiciaries necessary to uphold them. For another, developing countries lack high levels of human capital, infrastructure, and other resources attractive to multinational ventures.
Over the past several decades, many nations — such as South Korea, Singapore, and the United Arab Emirates — have therefore competed with larger powers and escaped poverty by fostering business environments with low taxes and minimal regulations.
Chris Edwards — the Director of Tax Policy Studies at the Cato Institute — notes that a “global minimum tax rate would undermine small‐country growth prospects, and that would not be fair at all.”
Indeed, small nations have expressed concern with the G7’s global minimum tax proposal. As Paschal Donohue — the finance minister of Ireland, which has a corporate tax of 12.5% — said in April: “I believe that small countries, and Ireland is one of them, need to be able to use tax policy as a legitimate lever to compensate for advantages of scale, location, resources, industrial heritage and the real, material and persistent advantage enjoyed by larger countries.”
On the other hand, if the G7 does not effectively force smaller nations to adopt the 15% tax floor, then the smaller nations would simply become more competitive on the global stage relative to the United States and other large economies.
Romina Boccia — former Director of the Heritage Foundation’s Grover M. Herrman Center — observed that President Trump’s 2017 corporate tax cut “significantly improves America’s position in global financial markets” as businesses are “more inclined to conduct and expand their operations within U.S. borders and employ American workers.”
By binding itself to a minimum corporate tax threshold, the United States would limit its capacity to enact tax reforms that would increase competitiveness against other powers. Ireland, the United Arab Emirates, and any other economy outside of the G7 would be able to keep their liberal corporate tax regimes, thereby continuing to draw business away from any country that does not follow suit.
Beyond the effects on smaller nations, the global minimum tax could simply push countries into competition in other domains — such as tax credits, deductions, and other favors that produce different “effective” tax rates across nations. Such a reality would relegate the G7’s global minimum tax to a dead letter.
Daniel Bunn — the Vice President of Global Projects at the Tax Foundation — writes that “a global agreement would not be worth the paper it is written on” if it does not make economies’ tax structures sufficiently uniform.
“In a way, the goal of the negotiation is to weed the garden of international tax before planting the seeds of a new system,” he continues. “But because weeds can grow back, the agreement also needs to prevent new tax rules that are contrary to the new structure.”