Today, I finally get to shed light on a controversial economic concept that has recently sprouted into reality: a global tax system.
Biden’s recent commitment to make corporations pay their fair share in taxes by effectively preventing companies from booking their profits in countries with lower taxes (tax havens) was deemed a stretch by many. Much like criticisms regarding proposed wealth taxes (which have recently been proven to be very successful in countries that have implemented them), many opined that a global tax system would instantly crumble under the fact that tax haven countries would not want to implement them or that it would simply be too difficult to enforce.
However, UC Berkeley professor and economist Gabriel Zucman, someone who has dedicated much of his career to researching wealth inequality and has fervently fought for both a wealth tax and a global minimum tax rate, begs to differ. Zucman clarifies on Twitter and in his book, The Triumph of Injustice, that a global tax rate does not mean that every country would increase their corporate tax rate to 15%, but that they would be forced to make up the difference in percentage to their home country.
The deal has two components The most important component is the minimum tax of 15% This does NOT mean that all countries must increase their corporate tax rate to 15% It means that multinational profits will be subject to a 15% minimum effective rate…Tweet
Take a German multinational that books income in Ireland, taxed at an effective rate of 5% Germany will now collect an extra 10% tax to arrive at a rate of 15%—same for profits booked by German multinationals in Bermuda, Singapore, etc Other nations will proceed similarly
For example, a global tax rate of 15% means that an American multinational which originally booked its profits under a (hypothetical) low 5% Irish corporate tax rate to avoid taxes would now have to pay the United States government an additional 10%, essentially disincentivizing firms from booking profits overseas in the first place.
As for enforcement, Zucman has advocated for increased funding to the IRS, which has experienced a sharp decrease in its budget over the previous decade, dramatically reducing its number of agents and operating power.
Zucman and his partner, Emmanuel Saez, have received plenty of criticism from plenty of economists throughout their career. Given the revolutionary nature of their research and proposals (a sharp steer away from the decades-long, race-to-the-bottom approach to corporate taxation), such criticisms are to be expected. But what truly matters is that their once purely theoretical proposals are now being put to the test by countries around the world, and their ideas have certainly captured the attention of President Biden, who has strayed considerably further to the left on economic issues than expected.
So, how close are we to a global tax rate becoming a reality?
After a period of negotiations, the finance ministers of the G7 countries have agreed to a global minimum tax of 15% on multinational corporations. This is a major step forward towards what will be a long diplomatic fight for such a tax to be implemented. The next step would be to seek such an agreement among another 140+ countries that are led by the Organization for Economic Cooperation and Development (OECD).
Some have criticized the low 15% rate and even Zucman has advocated for a rate closer to 25%; however, it is important for the United States to just get its foot through the door. It will be much easier to implement a higher global corporate tax rate once there is one to begin with.
Now that a 15% minimum tax is secured, let’s be clear: nothing prevents us to move quickly to 25% No need for a global agreement: the US can tax its multinationals at 25%, France do the same, etc Having the main countries on board is all you need to reach a global 25% minimum…Tweet
Tax havens cannot block a high minimum tax — because other countries can always choose to collect the taxes that tax havens choose not to collect And big countries have interest in jointly adopting a high minimum tax — as they don’t benefit from tax competition Let’s go!
Although there is still a long way to go until a global tax rate could possibly be implemented, an economic revolution seems to be within sight. Free-market enthusiasts have already begun panicking about the news, which has led me to ask: if a global tax system wasn’t supposed to work in the first place, why are so many worried about the possibility of one?