Acton Institute Powerblog

Explainer: the ‘global minimum tax’

Treasury Secretary Janet Yellen. (Photo credit: Public domain.)

Treasury Secretary Janet Yellen has said she plans to impose a global minimum tax on U.S. corporations, which she will coordinate with global leaders to stop “a destructive, global race to the bottom.” How will this work; what will it do to U.S. competitiveness; and is it constitutional? Here are the facts you need to know.

What is a global minimum tax?

A global minimum tax would see wealthy nations agree not to lower their tax rates on corporations that are based, or (in some proposals) do business in, their nations below a specific level. Corporations would then pay a similar or identical amount of taxes regardless of where they are located, discouraging offshoring to low or no-tax nations and encouraging higher taxes and spending. Current proposals make this collaboration between sovereign governments voluntary rather than compulsory.

Why do politicians want to impose a global minimum tax?

Corporations respond to tax incentives and disincentives, just as individuals often “vote with their feet” when a state’s taxes become too high. Politicians, especially in high-tax nations, want to prevent low-tax nations from attracting “their” businesses by allowing stockholders to keep more of their profits. Yellen’s former mentor, Nobel Prize-winning economist Joseph Stiglitz, lamented that “every country thinks it can steal business from others by lowering taxes.”

Yellen has also said a global minimum tax would boost U.S. “competitiveness” – after redefining the word. “Competitiveness is about more than how U.S.-headquartered companies fare against other companies in global merger-and-acquisition bids,” she said. “It’s about making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods and respond to crises.” However, the IRS collected more than $3.5 trillion during the booming 2019 fiscal year – more than enough to provide for the delegated powers conferred upon the federal government by the Constitution.

How does the U.S. corporate tax rate compare to other nations?

Although President Donald Trump’s Tax Cuts and Jobs Act of 2017 reduced the U.S. corporate tax rate from 35% to 21%, the combined federal-state corporate tax rate is already higher than the global average of 24%. President Joe Biden’s “infrastructure” plan proposes raising the U.S. corporate tax rate to 28%, with an effective rate of 32% – making the U.S. even less competitive in the traditional sense.

What would the global minimum tax rate on corporations be?

No one agrees. The Biden administration wants to set the global minimum tax at 21%, our current level, while European leaders support a rate of 12.5% – the corporate tax rate of its lowest-tax nation, Ireland. European leaders seem to realize the advantage lower corporate taxes give them over the United States and seek to make them permanent.

Do higher corporate tax rates bring greater revenue?

The Laffer Curve also applies to corporate taxes: Lower taxes bring higher revenue. In 1990, the average corporate tax rate was nearly 40%, but the revenue that corporate taxes generated in the 36 wealthiest nations amounted to 2.4% of GDP. Today, with corporate tax levels at nearly half that rate, corporate tax revenues in the same countries amount to 3.1% of GDP. In the UK, corporate tax revenues are as high today as in 1985, when the rate stood at 40%. “Lower rates do not always mean lower collections,” writes Scott Hodge of the nonpartisan Tax Foundation.

How would the ‘global minimum tax’ affect the U.S. economy?

“Raising the U.S. corporate tax rate to 28 percent, as President Biden has proposed, would reduce the long-term size of our economy by 1 percent, reduce wages by 0.8 percent, and eliminate 187,000 jobs,” wrote Hodge.

How do higher corporate tax rates affect consumers and workers?

Corporate taxes get passed on to the consumer in the form of higher prices. Higher corporate tax rates discourage investment, leading employers to fire workers, delay raises, or curtail hiring. A relatively low percentage of corporate tax hikes come from shareholders’ earnings. A team of researchers led by Northwestern University’s Scott Baker found that consumers, workers, and shareholders each absorbed approximately one-third of corporate taxes (31%, 38%, and 31%, respectively).

How would the global minimum tax be implemented?

One proposal would reward confiscatory tax policies while violating national sovereignty. The Washington Post reported in March that one plan would have the OECD establish a global minimum tax rate – and allow high-tax nations to tax overseas earnings in lower-tax nations:

For example, Hungary could maintain its existing 9 percent corporate tax rate even after the new 12 percent minimum is enacted. But under the OECD agreement, France could collect taxes on the income earned by French companies in Hungary amounting to the difference between Hungary’s corporate tax rate and the 12 percent global minimum — a measure known as a “top-up” tax.

It is unclear how U.S. politicians would explain their desire to let foreign nations enrich themselves by taxing U.S.-based firms, raising consumer prices, and costing American jobs.

Is the global minimum tax constitutional?

The notion of any policy being set by a supranational governing body is ipso facto unconstitutional. However, the global minimum tax on corporations – at least, as proposed now – is being presented as an informal, voluntary agreement among members of the Organization for Economic Cooperation and Development (OECD). Specific collection mechanisms may well violate the Constitution. Then again, any administration considering a global tax long ago turned its back on constitutional limitations on leviathan government.

How does the global minimum tax affect American democracy and U.S. voters?

Even a “voluntary” global minimum tax harms American democracy and deprives Americans of self-determination. It allows foreign nations – whom U.S. voters have not, and cannot, elected – to set the parameters of policies that could harm hundreds of millions of Americans. It immerses the views of the American people into the sea of “world opinion,” diluting democratic decisions and watering down the will of the American people with those of Eurosocialists.

What should Christians think about this?

“The power to tax is the power to destroy,” said American statesman Daniel Webster. Christians are called to use their creative capacity to build. Corporate taxes destroy jobs, lower wages, and raise prices on average Americans. Meanwhile, American citizens would lose some measure of their control over their own government – a reality alone that makes such a scheme worth opposing.

Rev. Ben Johnson

Rev. Ben Johnson is Executive Editor of the Acton Institute's flagship journal Religion & Liberty and edits its transatlantic website.