Corporate tax fairness
Sound fiscal policy encourages businesses to invest where their capital can find its most productive use, in terms of real economics, rather than on the basis of advantageous tax rules, which are subject to political influence. Not only does this optimize market efficiency but also, by preventing various tax jurisdictions from competing for investment, it optimizes revenue collection.
That is the theory: Needless to say, reality falls short of the nice, neutral ideal. Still, it is worth revisiting these basic principles to understand the Biden administration’s new ideas for corporate taxation, which combine higher U.S. rates with efforts to coordinate corporate tax policy internationally.
To bring in revenue for his infrastructure plan, the president proposed raising the federal corporate tax rate from 21% to 28% (with a minimum rate of 15%, even after deductions, for about 180 firms that report $2 billion or more in income).
This won’t work if U.S. firms flee to lower-tax countries, so Treasury Secretary
Janet Yellen has endorsed a new global corporate minimum tax that would not only prevent a new “race to the bottom” on business taxation among advanced industrial countries but also dampen the one that already exists. Mutual disarmament on tax rates could help all countries raise revenue at a time when all have taken out huge debts to cope with the pandemic.
All of the above departs from policy under the Trump administration.
The Biden administration frames its approach as ending incentives for U.S. multinationals to flee for tax havens; and there has indeed been much tax avoidance via methods such as booking intellectual property offshore.
If successful, though, the new approach would level the playing field for global capital generally, a win for all countries.
Despite much upbeat talk from U.S. and European negotiators, there is a long way to go before a deal gets done. Nevertheless, it is a worthy objective that the Biden administration, in consultation with peer nations around the world, should pursue.