Global minimum tax rate- Issues and advantages

Introduction

• United States Secretary's proposal for global coordination of corporate taxation has huge implications.
• She has proposed a global minimum tax rate.

View of World Bank chief on Global minimum tax rate

• David R. Malpass, President of the World Bank, representing the interest of global capital, has voiced his opposition.
• He was shooting from the shoulders of the poor countries when he said the proposal “...would hinder poor countries’ ability to attract investment”.

Reason for this initiative by the USA

• Impact of the pandemic.
• Presently, governments need resources to help people through the transfer of incomes, provision of more public services and also prevent business failures.
  • But their resources have been adversely impacted by the economic downturn.
• Consequently, fiscal deficits have reached record-high levels.
• In the pre-pandemic era, such levels of the deficit would have led to the tanking of the stock markets but now they are booming in anticipation of demand being pumped in by these high deficits.
• The result is a massive increase in inequality between those who have gained in the stock markets and those who have lost employment and incomes.
• Additional tax collections can help reduce these large deficits and that is the reason for the U.S. administration’s current proposal.

Other alternatives

• However, some rich Americans like Jeff Bezos have supported the idea of taxing the rich more.
• Such proposals have been around since 2011 when many of the rich in the U.S. and Europe had supported higher taxation on the rich.
• Warren Buffet had floated this proposal to strengthen capitalist economies after the global financial crisis of 2007-09.
  • Instead of raising the tax rate on corporations, the Trump administration cut the highest marginal tax rate from 35% to 21% with effect from January 1, 2018.
• This gives a hint as to why it is both difficult to raise corporation tax rates and why Ms Yellen has proposed a global agreement on corporate taxation.

Case study: Soviet Union

• When the Soviet Bloc collapsed in 1990, nations in eastern Europe were badly hit and needed capital infusion to overcome their economic woes.
• To attract global capital, they cut their tax rates sharply.
• This resulted in a ‘race to the bottom.
• Nations in Europe were forced to cut their tax rates one after the other to not only attract capital but also to prevent capital from leaving their shores. This had global implications.
• Nations became short of resources and cut back expenditures on public services and encouraged privatisation.
• Governments lacked resources for education, health and civic amenities.
• The developing countries followed suit even though private markets do not cater to the poor.
  • Thus, disparities increased within nations.

BEPS and loss of revenue

• The world experienced Base Erosion Profit Shifting (BEPS).
• Namely, companies shifted their profits to low tax jurisdictions, especially, tax havens.
  • For instance, many of the most profitable companies like Google and Facebook are accused of shifting their profits to Ireland and other tax havens and paying little tax.
  • EU has levied fines on Google and Apple for such practices. Former U.S. President Barack Obama in 2009 had said that the U.S. was losing $100 billion in taxes due to such practices.
• Since all the OECD countries have suffered due to cuts in tax rates and BEPS, initiatives have been taken to check these practices.
• But they will not succeed unless there is agreement among all the countries.

India’s recent cut in the tax rates:

• Any country facing economic adversity can cut its tax rates to attract capital and force others to follow suit.
• India has also cut its tax rates since the 1990s.
• Most recently in 2019, the corporation tax rate was cut drastically to match those prevailing in Southeast Asia.
• Such cuts have implications for both inequalities as well as for funding the schemes for the poor and the quality of public services.

The regressive tax structure

• Another implication of the reductions in direct tax rates has been that governments have increasingly depended on the regressive indirect taxes for revenue generation.
• Value-Added Tax and Goods and Services Tax have been increasingly used to get more revenues.
• This impacts the less well-off proportionately more and is inflationary.
• Direct taxes tend to lower the post-tax income inequality.
• The rising inequalities result in a shortage of demand in the economy and its slowing down which then requires more investment and that calls for more concessions to capital.
• However, that does not guarantee revival because investment in response to a tax cut is uncertain.
  • Instead, increased government expenditures are sure to raise demand.

Way forward

• The impact of all this will be far-reaching impacting inequalities, provision of public services and reduction of flight of capital from developing countries such as India and that will impact poverty.
• So, a global minimum tax rate is worth a try in spite of the objection raised by the World Bank President.