Janet Yellen: her global minimum tax plan lacks detail and is impractical
On 5 April, US Treasury Secretary Janet Yellen said America wants a global agreement fixing a minimum corporate tax level.
This follows President Biden’s announcement that he planned to raise US corporation tax to 28 per cent from 21 per cent to help finance record increases in US government spending and infrastructure investment.
Biden has lamented the fact that some of America’s biggest companies pay very little federal tax. A report this week from the US Institute on Taxation & Economic Policy found that 55 big American corporations paid no federal taxes in the past fiscal year, despite reporting combined profits of $40bn.The average effective corporate tax rate is around 11 per cent.
The global tax pact is designed to deflect criticisms of higher tax voice by Republicans and others. It’ll go up but the US economy will not be disadvantaged globally.
Champions of the global tax reform are delighted.
“Class warfare has taken place in the USA, and the wealth owning classes won,” taxation specialist Richard Murphy wrote on 8 April. “20 per cent of the overall US tax burden was shifted from the corporations largely owned by the wealthy onto working people.”
He welcomed the minimum tax plan but said that assessed profit should be apportioned to the country where it’s made. There are huge technical issues to be overcome.
Murphy’s right. The problem with any set of rules is that they have to be agreed and enforced. The new ones Yellen is hoping to secure on a global basis will have loopholes and perverse consequences. It’s unlikely her plans will work in the way Yellen hopes even if they secure global support.
Transnational institutions have generally failed to deliver their stated goals. The UN hasn’t stopped war, the World Bank hasn’t made poverty history and the IMF’s not ended economic crises.
But the real problem is that Yellen’s plan is aiming at the wrong target.
It isn’t inadequate global tax rules. It’s that companies have been allowed to convert their assets into a form that makes moving them from one country to another almost costless and instant.
In short, intangible capital is the culprit.
Once that’s realised, the policy measures are obvious. The goal should be to encourage companies to invest in assets that can’t be easily moved across borders: physical capital and/or government infrastructure bonds.
That requires action at the national and sub national level rather than a global agreement (involving more than 200 countries and thousands of individual tax jurisdictions) that accountants and lawyers will almost immediately undermine.
For the UK, which has since Brexit largely recovered its capacity to set its own rules for business, this would entail two comparatively uncomplicated steps.
1 Require companies doing business to have a fully-incorporated entity based in the UK
2 Require companies incorporated in the UK to have a minimum level of physical assets and government infrastructure bonds in their balance sheets. This could be set at the equivalent of 100 per cent of recorded sales and could be facilitated by offering firms tax concessions if they exceeded this level.
A reasonable deadline could be fixed: perhaps five years for full compliance.
This would automatically remove the incentive for firms to sell physical assets and invest in intangible ones, where the returns have been invariably been higher.
The result would be the inevitable withering of tax havens. But that’s not the main aim which is to channel the trillions now being held in assets that generate income but no value into productive, employment-creating activities and the infrastructure that the free market won’t deliver.