Making of Bidenomics

The idea of a global minimum tax rate has merits

The Joe Biden administration’s response to the Covid challenge has been extraordinary. The pandemic looks comparatively under control, thanks to the pace of vaccination, and the economic recovery is getting stronger than anticipated earlier. After a massive $1.9-trillion relief package, the Biden administration has unveiled a $2 trillion infrastructure plan. While the fiscal push will boost growth in the near term, its longer-term implications are not yet settled. In a way, the administration is challenging some of the popular economic policy wisdom. Several economists have argued that fiscal intervention at this scale could result in overheating. The Biden administration now plans to increase the corporation tax rate from 21 per cent to 28 per cent. The US is also advocating a global minimum corporate tax rate, which could have far-reaching implications.

US Treasury Secretary Janet Yellen argued last week in favour of stopping “a thirty-year race to the bottom on corporate tax rates”. The International Monetary Fund also supports the idea. The popular policy view is that lower corporate tax rates encourage investment, which results in higher economic growth and creates more jobs. But this thesis is now being questioned in the world's largest economy. It is being argued that corporate tax cuts by the Donald Trump administration did not result in higher investments. Thus, if tax cuts did not lead to higher investment, a higher rate of taxation will not hurt jobs. But if that was the case, countries would not have indulged in this “race to the bottom”.

But a possibility of losing out on investment is not the only factor driving the idea of a global minimum tax rate. The bigger problem over the recent years has been the shifting of profits by large corporations, particularly Big Tech, to lower-tax jurisdictions or tax havens. Large tech firms are avoiding taxes in their home countries, which is also boosting their net profits. According to the Organization for Economic Co-operation and Development (OECD), governments are losing tax revenue worth $100-240 billion annually because of profit shifting. This essentially means that governments are taxing citizens more to meet their obligations. This is what the Biden administration intends to end. Consider this: The four largest companies in Ireland, according to a ranking by Irish Times, are Apple Ireland, Google, Facebook, and Microsoft. Ireland has a corporation tax of 12.5 per cent. While the idea to stop tax shopping has merits, efforts in this direction have not yielded much in recent years.

In fact, with no consensus emerging on taxing digital firms, India, along with several other countries, imposed a digital tax on tech giants. But this didn’t go down well in the US and it is planning to impose retaliatory tariffs on Indian imports. Thus, it makes sense for India to actively participate in building a global consensus on all aspects of corporate taxation. A consensus on global taxation rules will provide more clarity and increase transparency. However, arriving at a global agreement may not be easy. The average corporation tax rate in OECD countries is 21.5 per cent, and the US is proposing a minimum tax rate of 21 per cent. It is likely that countries with lower rates may not agree easily. But efforts must be made to convince them because if the tax rate is set too low, it would defeat the purpose to a large extent.