PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

PERSPECTIVE: A Global Minimum Tax is Anti-Growth, Undermines U.S. Competitiveness

By at 26 July, 2021, 9:01 am

by RAYMOND J. KEATING –

Three philosophies or concerns can be identified among American politicians when it comes to how they wish to tax U.S. businesses in the international marketplace.

First is what might be called the “growth group.”

They emphasize keeping taxes as low as possible so that economic growth, generated by entrepreneurship and private investment, can flourish. When it comes to international taxation, their emphasis is on low taxes attracting entrepreneurs, labor, businesses and investment.

For good measure, they understand that since the economy is not a zero-sum game (more on that in a moment), it makes sense to not punish – such as via penalizing taxes and/or regulations – international investments made by U.S. businesses, and instead allowing them to establish a more productive allocation of resources, which in turn makes for a healthier, more competitive business internationally and at home.

Second is the “government group.”

This group focuses on how to extract as much revenue as possible from private-sector businesses, with businesses treated as cash cows without regard for the effects of policymaking. Therefore, it wishes to eliminate any kind of tax competition occurring between nations.

Low tax countries simply are acting irresponsibly, in this view, as government needs to stop “a race to the bottom” on taxes, and instead, must drain as much revenue from businesses (not to mention high-income earners) in order to fund all kinds of undertakings preferred by politicians. The government group’s dream is to generate tax rules that impose a global minimum tax on business and investment, so countries can put aside that pesky tax competitiveness issue, and get down to increasing government spending.

Third is the “zero-sum group.”

They see any kind of investments made by U.S. businesses in other nations as being a negative for America, and they wish to arrange taxes so as to punish such investments. They ignore all kinds of economic realities, such as investing to capitalize on and/or create opportunities, to reach consumers in other nations, and to efficiently allocate resources to the benefit of the entire business. In their misguided, zero-sum view of the economy, any investments made by U.S. firms in other countries must be bad news for America.

Therefore, they call for various ways to impose additional tax burdens on such international investments made by businesses. By the way, there can be a significant amount of overlap between the government group and the zero-sum group.

How do current tax systems generally work regarding multinational corporations’ earnings?

Country’s tax income earned inside their borders. And most nations simply exempt foreign-source income from taxation.

However, the U.S. adds complexity and additional tax burdens on what U.S. businesses earn in other countries. The Tax Policy Center of the Urban Institute and the Brookings Institution provides a summary of how the U.S. system works.

Source: Tax Policy Center of the Urban Institute and the Brookings Institution

The complexity is counterproductive, that is, unless one views the economy as a zero-sum game and/or your focus is on draining as much as possible via taxes from business.

Enter the “Global Minimum Tax”

Unfortunately, the Biden administration has been pushing for a global minimum tax, including recent announcements with the OECD and the G-7. While the details remain vague, Treasury Secretary Janet Yellen has pushed an agenda featuring a new tax on companies with annual revenue exceeding $20 billion and profit margins in excess of 10 percent.

That apparently is designed to target leading U.S. technology firms, of course, to the delight of an assortment of politicians and tax collectors in other nations. The OECD likes the idea, but at a lower revenue threshold. That tax would come in addition to a global corporate minimum tax of at least 15 percent.

However, there are companies targeted by an assortment of government officials that might escape these taxes. So, the OECD advocates an Amazon tax. As The Wall Street Journal explained:

“Amazon in its entirety would fall outside pillar one’s scope because its pretax profit margin of about 6.3% is too small. Last week’s deal gets around this by allowing for ‘segmentation.’ This would let governments apply the tech tax to a company’s business units even if the company as a whole doesn’t meet the revenue threshold. Amazon’s Web Services division would become taxable, which foreign leaders such as French Finance Minister Bruno Le Maire demanded.”

A Global Tax is Anti-Growth

Make no mistake, any global tax accord that seeks to set minimum tax rates and impose higher taxes on certain businesses – as opposed to free trade agreements that work to reduce taxes (i.e., tariffs) and other governmental burdens – works against economic growth.

In this case, U.S. businesses are being particularly disadvantaged, given the Biden domestic agenda. As the Tax Foundation noted:

“Biden is proposing a more burdensome set of tax rules for U.S. multinationals than has been discussed at the OECD. The U.S. has participated in these conversations and is supportive of the agreement, but it is not clear how this will influence Biden’s agenda in Congress. If the Biden approach on GILTI [Global Intangible Low-Tax Income (GILTI) ‘is the U.S. version of a minimum tax on the foreign earnings of U.S. companies’] is adopted while the rest of the world takes a lighter form of a global minimum tax, that will have significant ramifications for U.S. businesses, making them less competitive against their foreign peers.”

In the end, limiting tax competitiveness and hiking costs directly on large U.S. businesses – such as leading technology firms – will be a negative for the overall economy, and that includes for small businesses.

Consider that, for example, raising costs on large technology firms will negatively affect those businesses, and therefore the small and mid-size businesses (SMBs) that are not just customers of those large businesses but also partners with them, that is, they grow and profit from using platforms like Amazon, Facebook and Google.

Some might feel bewildered as to why the Biden administration would go down this path. But this agenda on international taxes aligns with the White House’s policy proposals in terms of domestic tax policy and regulatory efforts, such as expanding the use of antitrust regulation to attack leading U.S. tech firms and “big” businesses.

Fortunately, these types of accords carry absolutely no power. For example, like the Paris climate accord, actual policies would have to be implemented by Congress. The OECD minimum tax agreement holds no real weight of law or policy, other than that this particular White House agrees to pursue such policies, as do the other countries signing the measure. Indeed, an agreement with real legal weight would be a treaty requiring two-thirds approval by the U.S. Senate.

Nonetheless, the fact that the Biden White House actually signed on to such an anti-American-business agenda is deeply concerning. Clearly, President Biden and many in Congress currently are in the “government group,” the “zero-sum group,” or both, when it comes to international taxation. But what’s really needed is policymaking from the “growth group.”

Here’s a sound policy framework: Exempt foreign-source income earned by U.S. multinationals from taxation, as most other nations do; and provide substantive tax and regulatory relief that will attract entrepreneurs, businesses and investment.

Let’s engage aggressively in some tax and regulatory competition. That’s not a race to the bottom; it’s a race to the economic top that will create more entrepreneurship and opportunity.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

 

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