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Yellen pushes for a global minimum tax rate to create a ‘level playing field’

Raising corporate taxes is a key part of paying for President Joe Biden’s $ 2 trillion infrastructure package. In order to prevent American multinationals from being at a competitive disadvantage, the administration is pushing for other countries to commit to a tax floor.

In a speech to the Chicago Council on Global Affairs Monday, Treasury Secretary Janet Yellen announced a return to multilateralism after four years of diplomatic and economic isolationism. “America First should never mean America alone,” Yellen said.

“This is an area where the United States is now trying to exercise some leadership,” said Eric Toder, institute fellow at the Urban-Brookings Tax Policy Center.

Yellen called on other countries to support the initiative, saying the United States was working with other G20 countries to develop and implement a global minimum tax, which she said would “stop the race to the bottom.” and promote more equitable economic growth between countries and regions.

“Together, we can use a global minimum tax to ensure that the global economy thrives on a more level playing field in the taxation of multinational corporations, and drives innovation, growth and prosperity,” she declared.

Biden’s plan calls for a 28% corporate tax rate – effectively dividing the difference between the 21% rate signed into law in 2017 and the 35% it was before the GOP tax cuts – and double the current offshore tax rate of 10.5 percent.

The president rejected the idea that raising corporate tax rates would hamper the economic recovery of the United States, telling reporters at the White House on Monday: “There is no evidence of this.

Political observers say a global minimum tax would be a boon to Biden’s national corporate tax ambitions: if all businesses – not just US-based multinationals – were taxed the same In taxation, no matter where in the world they have made their profits, there is little reason to set up top offices in places where economic activity is weak but with low tax rates.

“The discussion about this earlier also suggests that they are concerned about capital flight if they raise corporate taxes for the infrastructure bill,” said Michael O. Moore, professor of Economics and International Affairs at George Washington University.

“Business is multinational these days, and the idea of ​​corporate residency makes little economic sense,” Toder said. While it is now a thorny issue for companies ranging from social media platforms to drug manufacturers, the issue of locating or relocating a business for tax evasion purposes does not arise. is asked only recently.

“The problem has worsened a lot over the past 20 to 25 years. The nature of business has changed and become more global, and more of the added value is in intellectual property as opposed to factories, ”Toder said. Computer code, chemical formulas and the like are portable assets just like cars or jet engines.

Secretary Yellen has the advantage of being well known and highly regarded by her peers on the global economic stage, and her words carry weight, noted Tom Martin, Senior Portfolio Manager at Globalt Investments. “Overall, Janet Yellen enjoys an excellent reputation as a thoughtful and sophisticated global market player. It’s hard to take away the gravity it brings, ”he said.

But even she will have a heavy load to convince a multinational consortium to agree on the principle, let alone negotiating details like an actual global tax rate, which was not discussed on Monday. Achieving compliance could be a tall order, some say. “The incentives for a government to forgo such a promise of a minimum corporate tax will be overwhelming,” Moore said.

“Countries that decide to attract ‘desirable’ businesses or activities will find a way around the global minimum through tax credits [or] special deductions, ”said Gary Hufbauer, a non-resident senior researcher at the Peterson Institute for International Economics. “China will pay no attention to the OECD global minimum. Russia and many other countries either. “

The administration is also likely to face resistance in its country to any plans to generate revenue by raising corporate taxes, with Republican lawmakers already speaking out forcefully against Biden’s proposal to fund his infrastructure plan. .

In theory, an international tax with independent border enforcement would be an equalizer between companies – but the question remains whether or not CEOs will want to trade the certainty of a fixed tax rate for the desirability of doing so. more profits. “As long as it affects them all equally, then it’s not a competitive event,” Martin said.

“If you only tax American companies on their global revenues, it really puts them at a disadvantage,” Toder said. “If Biden tries to impose a tax on American businesses and other countries don’t follow suit, that’s the recipe for failure.”

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