The world is currently at a crossroads of economic uncertainty. Many businesses are finally getting out from underneath the impacts of COVID lockdowns and restrictions. Tensions between the world’s economic and military superpowers are higher than they have been in some time. The United States stands on the brink of a catastrophic debt default. Businesses – especially those that operate internationally – have a lot about which to be concerned. Companies should be focused on expanding their businesses rather than an added layer of taxation.
Unfortunately, American and global leaders are not pursuing avenues to alleviate this uncertainty or that would create a more business-friendly climate. Rather, they are advancing quite the opposite. A global corporate minimum tax adds to this uncertainty. It would also incentivize allied nations to harm their domestic economies and business communities. Level-headed lawmakers ought to recognize the harm caused by continuing to usher this policy forward.
The global minimum tax – more commonly known as “Pillar Two” – is fairly straightforward. The Organization for Economic Cooperation and Development (OECD) provides a template for nations to ensure no one has an effective corporate tax rate below 15 percent. This is meant to prevent businesses from basing operations in low-tax jurisdictions. Countries that sign on allow foreign nations to tax their businesses to ensure they are paying at least a 15 percent tax rate across multiple jurisdictions.
First, this is transparently targeted towards American companies, with 65 percent of the companies paying the new Pillar Two tax being based in the United States. Most of the large corporations in the world are based in the United States. Instead of bemoaning this reality, American leaders should be encouraged that its tax law and economic climate encourages such bold innovation and development. In supporting this agreement, the Biden administration allowed foreign nations to target and tax American companies, setting them back compared to the rest of the world.
Secondly, the goals of the Pillar Two tax are counterintuitive. One of the stated reasons for advancing this policy is to stop the “race to the bottom” on corporate tax rates. Put another way, the OECD leaders who developed this plan and encouraged all nations to sign on want other nations to keep their tax rates high. Anyone who cares about the global economy – especially given the recent uncertainty – should want to encourage nations to create more favorable tax frameworks, not discourage it. Tax competition encourages economic growth while tax harmonization encourages bureaucratic growth.
Before tax reform was passed in 2017, the United States “won” the race to the top with the highest corporate tax rate (effectively 40 percent) which caused businesses to flee the country. Lowering the corporate tax rate to 21 percent incentivized businesses to come back to the United States…and they did.
The Tax Foundation’s analysis of the plan does not paint a pretty picture for the world’s economic future. According to the report, Pillar Two would limit the ability of multinational companies to plan for taxes. It would discourage foreign direct investment (FDI), slow overall global economic growth, and introduce new complexities to international tax law. None of these signals a desire to improve on the current economic situation. It will certainly not add any certainty.
The logistics of the plan – beyond the economic principles – only add to the problems. If the United States were to implement Pillar Two as a binding international treaty, it would be very difficult to pass in the Senate. If it were merely a verbal agreement or a set of mutually-agreed-upon principles, it could be ripped up at any time. Businesses would have no idea whether or not to plan on the continuance of Pillar Two or not. This would drastically impact where investment goes or whether investment is made at all in some cases.
It will also be very likely that some nations will deem it in their best interest to avoid Pillar Two altogether. After all, if most all nations shoot themselves in the foot by making their country less attractive to business opportunities, there will be an enterprising few who will see a clear opportunity to fill the void. With a number of high-profile nations planning on abandoning the U.S. dollar as its reserve currency, the U.S. should be trying to make itself more competitive, not less.
This reflects the pure absurdity of encouraging nations to sign a pact that would get as many as possible to hurt their business communities. As more nations sign, the benefits of not signing only increase and threaten to draw business away from those that do. This is a major reason why 76 taxpayer groups across 40 different countries urged their respective leaders to avoid joining the deal.
Pillar Two is the precise opposite of what the global economy needs. The global economy needs that “race to the bottom.” Countries should be doing everything they can to recharge a lagging global economy. They should be eradicating regulations and lowering taxes to encourage innovation and invite multinational corporations to do business with them. Pillar Two misses the mark in every way possible.
