So the goal of tax policy should be taking as much revenue as you can while trying to minimize distortions. Some kinds of taxes are more distortionary than others. In order of least to most harmful, it goes
1. Consumption taxes
2. Income taxes
3. Wealth taxes
Cut to our current tax debate, where these concerns get no attention. The goal seems less about minimizing distortions/maximizing revenue and more about punishment, i.e., rich people for making too much in a zero-sum world and corporations for being greedy. Now, I think our tax system should be more progressive, too. But there are good and bad ways to achieve that goal.
An agreement by wealthy countries to impose minimum taxes on multinational companies faces a rocky path to implementation, with many governments likely to wait to see what others, especially a divided U.S. Congress, will do.
Treasury Secretary Janet Yellen hailed the deal, reached by finance ministers of the Group of Seven leading rich nations over the weekend in London, calling it a return to multilateralism and a sign countries can tighten the tax net on profitable firms to fund their governments.
In countries with parliamentary systems, governments can quickly deliver on pledges, turning them into local laws and regulations. In the U.S., however, a slim Democratic majority in the House, an evenly split Senate, antitax Republicans and procedural hurdles complicate passage.
Buy-in will also have to come from a broader group of 135 countries in what is known as the Inclusive Framework. Some countries with very low tax rates — such as Ireland, with a 12.5% charge on profit — are reluctant to sign up. The U.S. has proposed tax changes that would penalize companies from countries that don’t impose the minimum taxes.
Author(s): Richard Rubin, Paul Hannon, Sam Schechner
Is it just me or are people obsessed with tax compliance lately? I suppose it is part of this fantasy that high earners and corporations have enough money to pay for all our new spending – we just have to force them to pay up.
You know what might be simpler than jacking up taxes and doubling the size of a government agency? A broader base and simplified tax system that doesn’t leave so much room for getting out of paying taxes. Take the idea of a global minimum corporate tax. Sounds sensible enough; after all, you can’t increase the corporate tax rate too much because it is so easy to send profits overseas where taxes are lower.
But anyone who studied public finance can tell you there’s the tax rate and there’s the tax base. Generally, it is better to have a broader base and a lower rate. You get more revenue that way, and it causes fewer distortions and enhances transparency. Maybe we can convince OECD countries to set a higher corporate rate, but that creates a new race to the bottom to degrade the base. Countries will compete to offer more loopholes and deductions. And that seems worse to me.
It’s time for the Democrats who elect presidents that promise not to jack up taxes on anybody but the rich to come to terms with something: These politicians can’t continue to spend that much money without raising taxes on nearly everyone, and that includes some regressive taxes. I don’t like it, since I’d prefer the size and scope of government to be significantly smaller—but this reality is not optional.
Here’s another reason why Biden was never going to be able to keep his promise: He already announced his intention to increase the corporate income tax from the current 21 percent to 28 percent. The reality here is that the corporations that he says are going to send bigger checks to the Internal Revenue Service (IRS) after the tax hike aren’t the ones who actually shoulder this heavier tax burden.
If you’re a U.S. firm that does business abroad, the TCJA essentially gives you an easy — but perverse — choice: You can move your foreign profits and operations to America, where the corporate tax rate is 21%, or you can keep them anywhere else in the world, where the U.S. will charge you around half that. It’s not a hard call, especially because the minimum tax is calculated based on a firm’s total global profits rather than looking at what the company earns in each different country. With no one looking at individual jurisdictions, corporations can shift and book profits wherever they can get the lowest tax bill. The TCJA also makes the first 10% of returns earned by foreign assets tax exempt, a powerful incentive for companies to offshore factories and jobs. It isn’t an overstatement to say that today most firms would prefer to earn income anywhere but America.
The U.S. isn’t the only loser in this race to the bottom. So are our corporations. The global competition for low rates allows American firms to pay less taxes — or none at all — but they still pay a significant cost. Over the next 10 years, more than $2 trillion of the U.S. corporate tax base will flow out of the country because of the broken system I’ve described. Our tax revenues are already at their lowest level in generations, and as they continue to drop, the country will have less money to invest in airports, roads, bridges, broadband, job training, and research and development.
A 15% minimum tax on large, profitable corporations that is part of President Biden’s infrastructure proposal would affect far fewer companies than the version he campaigned on, according to details the Treasury Department released Wednesday.
The tax — aimed at companies that report large profits to investors but low tax payments — would apply only to companies with income exceeding $2 billion, up from the $100 million threshold that Mr. Biden pushed during the campaign.
The Biden plan would now also let companies subject to the tax get the benefit of tax credits for research, renewable energy and low-income housing, a recognition that the campaign-trail version could have undercut the president’s preference to encourage companies to invest in those areas.
The result is that just 180 companies would meet the income threshold and just 45 would pay the tax, according to administration estimates that assume the rest of the administration’s plan gets implemented. Nearly 1,100 U.S.-listed companies would meet the $100 million threshold, according to S&P Global Market Intelligence. Many of them would still face sharply higher tax bills from the rest of the Biden proposals, which raise rates on domestic and foreign income.
It’s an idea that has been debated widely across global capitals: impose the same minimum corporate tax rate all over the world to prevent companies from shopping around for the country that can offer the smallest tax bill.
Now, it has a powerful new adherent. Treasury Secretary Janet Yellen on Monday expressed support for a minimum tax rate, providing the vital backing of the U.S. government.
Yellen, in a speech, said a minimum global tax rate would stop what she described as a “30-year race to the bottom” that has allowed big corporations to avoid contributing fully to vital national needs.
President Joe Biden and congressional policymakers have proposed several changes to the corporate income tax, including raising the rate from 21 percent to 28 percent and imposing a 15 percent minimum tax on the book income of large corporations. The proposals are being considered to raise revenue for new spending programs and would repeal changes to the corporate tax made by the Tax Cuts and Jobs Act (TCJA) in late 2017.
An increase in the federal corporate tax rate to 28 percent would raise the U.S. federal-state combined tax rate to 32.34 percent, highest in the OECD and among Group of Seven (G7) countries, harming U.S. economic competitiveness and increasing the cost of investment in America. We estimate that this would reduce long-run economic output by 0.8 percent, eliminate 159,000 jobs, and reduce wages by 0.7 percent. Workers across the income scale would bear much of the tax increase. For example, the bottom 20 percent of earners would on average see a 1.45 percent drop in after-tax income in the long run.
Corporations in the United States pay federal corporate income taxes levied at a 21 percent rate. Many states also levy taxes on corporate income. Forty-four states and D.C. have corporate income taxes on the books, with top rates ranging from North Carolina’s single rate of 2.5 percent to a top marginal rate of 11.5 percent in New Jersey. Fourteen states levy graduated corporate income tax rates, while the remaining 30 states levy a flat rate on corporate income.
In Nevada, Ohio, Texas, and Washington, corporations are subject to gross receipts taxes in lieu of corporate income taxes. Delaware and Oregon impose a tax on corporate income and a separate levy on gross receipts.
Compared to the OECD average, the United States relies significantly more on individual income taxes and property taxes. While OECD countries on average raised 24 percent of total tax revenue from individual income taxes, the share in the United States was 41.5 percent, a difference of 17.5 percentage points. This is partially because more than half of business income in the United States is reported on individual tax returns. OECD countries on average raised 5.6 percent of total tax revenue from property taxes, compared to 12.1 percent in the United States.
The United States relies much less on consumption taxes than other OECD countries. Taxes on goods and services accounted for only 17.6 percent of total tax revenue in the United States, compared to 32.3 percent in the OECD. This is because all OECD countries, except the United States, levy value-added taxes (VAT) at relatively high rates. State and local sales tax rates in the United States are relatively low by comparison.
There are rumors that the Biden administration is thinking of a 15% minimum tax on companies with book or accounting income (“GAAP” income) of $100 million or more. This proposal tends to bubble up on the national policy agenda off and on with unfailing regularity. For example, in April 2019 Senator Elizabeth Warren raised a similar proposal in the early days of her presidential campaign and the Joint Committee on Taxation, as far back as 2006 examined Treasury’s advocacy of such a tax. Sadly, this was tried once and was a failure. In 1986, the corporate minimum tax was amended to include an adjustment for book-tax differences, being applied from 1987 to 1989 before it was not renewed.
There are many pitfalls associated with the idea of taxing book income. For starters, companies that meet the threshold will try and minimize GAAP income to pay lower taxes. One could argue that is desirable as we often suspect that companies today inflate GAAP income to look better to their shareholders. Tying tax rates to book income would imply that earnings management, or attempts to artificially inflate GAAP earnings, will now incur a real cash outflow cost in terms of higher taxes. However, the usefulness of GAAP earnings would be severely compromised and if distorted by tax related maneuvers, will give managers and speculators even more fuel to spin narratives to justify wild valuations. One can even imagine a world where stock return volatility driven by uninformative earnings numbers might drive away uninformed investors from equity markets.
When comparing average 2019 and 1990 OECD tax revenue sources, the most notable change is a decrease in individual income taxes versus increases in social insurance and consumption taxes. The share of revenues from corporate income taxes has also increased compared to 1990 (despite declining corporate income tax rates). The relative importance of property taxes as a source of revenue has stayed roughly constant.