US Treasury Secretary, Janet Yellen has called for a global minimum corporate tax rate to ensure everyone pays their fair share and prevent companies from fleeing to countries with lower corporate tax rates.
Addressing the Chicago Council on Global Affairs, Yellen cited a “30-year race to the bottom” in which countries have slashed corporate tax rates in an effort to attract multinational businesses. She said the Biden administration would work with other advanced economies in the Group of 20 to set a minimum.
“Competitiveness is about more than how US-headquartered companies fare against other companies in global merger and acquisition bids.
“It’s about making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods. It is important to work with other countries to end the pressures of tax competition and corporate tax base erosion.”
Her remarks come on the heels of President Joe Biden’s $2.25 trillion infrastructure plan, unveiled last week.
Biden plans to finance the bill by hiking taxes on American companies from 21 percent to 28 percent. Officials say American firms currently pay roughly 13 percent on offshore earnings. The President is, as a result, seeking to raise the global minimum tax rate to 21 percent.
Taxes will lead to less investment
Critics of the proposal have expressed concerns that the “race to the bottom” will harm workers, who will feel the most pain if corporations are taxed more.
Speaking to the issue, Veronique de Rugy, senior research fellow at the Mercatus Center noted that raising taxes might not “help with inequality.”
“It is hard to see how raising the corporate income tax, the burden of which will be ultimately shouldered by workers and shareholders, will do to help with inequality.
“Also, raising corporate costs will lead to less investment in fixed assets. That helps no one considering the private sector is the driver of ownership in infrastructure and investment in infrastructure.”Veronique de Rugy
The Cato Institute has also estimated that Biden’s proposal would raise the amount of money collected from corporations by 38%.
Cato’s director of tax policy studies, Chris Edwards therefore warned that, raising the tax rate in the US will cause American corporations to move their profits and investments abroad and slash costs.
“If we get Amazon or General Electric to pay more taxes, they will end up paying their workers less. It’s kind of a cat-and-mouse game. The Biden administration wants to raise the corporate tax rate that will move investments out of the country and then they are trying to bring in rules to prevent that.”Chris Edwards
‘A deeper and long-lasting crisis’
Yellen also noted during her speech that many developing nations are lagging in vaccinating their populations. She revealed that some low-income countries may not access the vaccines they need at least until 2023 or 2024.
“The result will likely be a deeper and longer-lasting crisis, with mounting problems of indebtedness, more entrenched poverty, and growing inequality. We need to help lessen the economic pain in low-income countries.”
Yellen, as a result, renewed her call for the creation of $650 billion in special drawing rights (SDRs) at the IMF to address such issues.
Many Republicans in Congress however oppose the new allotment, arguing that much of the funding would flow to relatively better-off countries, such as China.
Yellen acknowledged that the additional credit would be distributed to each IMF member. But argued that “significant resources will go to the poorest countries most in need.”
She also noted nations can donate some of their funds to the hardest-hit countries, which she expects many will do.