President Joe Biden has proposed a global corporation tax floor of 21%. This follows the Biden administration’s decision to raise corporation tax from 21% to 28% to fund the US’s $2 trillion infrastructure package.
The proposed tax floor of 21% is planned to be put forward to other G20 nations. The Biden administration argues that the policy would stop the race to the lowest corporation tax and foster more equitable economic growth among countries and regions.
The introduction of this policy primarily aims to stop developing countries from intentionally lowering corporation tax. This allows nations to undercut other countries and incentivize foreign direct investment into their economy through lower corporation taxes.
Lowering corporation tax to compete internationally further incentivizes lower rates of corporation tax globally. This has led to increasing concern over how much tax international firms pay.
Firms such as Apple have avoided paying corporation tax on profits through various ‘tax loopholes’ along with multiple other multinational companies who avoid tax through tax ‘havens’.
Joe Biden has pushed for a tightening up of tax loopholes to halt large corporations from paying so little in tax. This policy primarily aims to stop the extent of capital flight in the US with many large firms who may exit the country with the US’s rise in corporation tax to 28%.
The global minimum tax floor would minimize the extent of capital flight as other countries’ corporation taxes will rise to 21% making these countries’ tax rates less attractive to foreign direct investment, therefore, reducing the risk of capital flight.
However, the primary problem with the Global tax floor is that large developing economies such as China and Russia will not listen to a global tax floor and may keep their corporation taxes well below the minimum tax of 21%.
This may lead to high levels of capital flight out of developed economies following the global tax floor policy. Countries who chose to not follow the policy provide internationally competitive tax rates that incentive foreign direct investment.
Countries such as Ireland are taking advantage of lower corporate taxes to incentivise large firms to invest in the Irish economy, because many more nations like this exist, it is unlikely a global corporation tax floor would be an effective measure at reducing tax havens and loopholes.
This is because these nations greatly benefit from setting these competitive rates as they receive extra investment from large, foreign, perhaps multinational firms, that find the low tax rates extremely attractive.
As a result of this, these nations such as Ireland see an increase in FDI, so, these countries experience long-run economic growth as their productive capacity would increase.
However, nations that abide by the competitive tax policy would be at a disadvantage.
This is primarily because the nations which abide by the tax rate would see a massive loss in FDI compared to the countries that ignore the policy.
So, the policy was likely introduced to fund Joe Bidens $2 trillion infrastructure projects and other large ambitious plans which the US government has, thus, it is inherently favoured towards the USA.
If the policy is a success there will be massive winners, the US in particular, however, nations that set competitive tax rates such as Ireland will be at a massive loss.
Because of how much the policy harms specific countries by decreasing their possibilities of economic growth, it is likely it will have little to no effect on how nations across the globe set their corporate tax rates.
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