With multinational corporations becoming increasingly powerful, a global effort towards shaping a unified policy on corporate tax rates is vital to ensuring governments can adequately enforce such corporations’ tax obligations without severely limiting any corporation’s agency or disincentivizing business in any singular country. That being said, while the idea of having universal policy consistency is vital, as the world’s largest economy, the United States requires the sovereignty to define its own policy within the framework of the universally agreed upon norm for corporate tax rates.
Before analyzing the feasibility and justifiability of a global corporate tax rate, an analysis of the problem is warranted. The problem is called Base Erosion and Profit Shifting (BEPS), where multinational corporations employ financial strategies to shift a majority of their taxable income to jurisdictions with lower corporate tax rates, and in the process avoid any tax obligations they would otherwise face in their country of origin or business. Essentially, BEPS means that multinational corporations that are founded or based in the United States can file their headquarters in nations with lower corporate tax rates. Thus, despite maintaining the same access to American markets and employees as if they filed for taxes domestically, they are able to skirt a considerable portion of their domestic tax obligations. BEPS practices cost the world up to $240 billion and American consumers around $130 billion in annual tax revenue that could otherwise go to socially beneficial programs and infrastructure. More tax revenue means better roads and schools and more resources for low-income families and the homeless, meaning better overall economic performance which benefits each and every citizen.
After years of discussion, the Two-Pillar Solution has been adopted as the basis for the 2021 watershed OECD minimum corporate tax rate agreement. The goal of the Two-Pillar solution is to shift tax revenue from headquarters jurisdiction to market or employee-based jurisdictions. By ensuring there is a general universal minimum for global corporate tax rates, the incentive to move from a higher corporate tax jurisdiction to a lower one would significantly decrease, as the difference in tax rates would be smaller. It is important to acknowledge that even a small number of holdout nations would make such an agreement ineffective, as the tax havens facilitating BEPS would continue to do so.
In order to counteract this effect and make the agreement viable, the United States needs to enforce its own unique tax regulations to raise tax liabilities for American companies moving their headquarters abroad. Without the leeway to do so, the current proposal will simply be ineffective. Incentives for American companies to move profits abroad will not decrease sufficiently with the imposition of a global corporate tax. Thus, the incentive to remain in the United States will need to grow significantly in order for it to be a profitable strategy. As America is the greatest shareholder of the economic damage inflicted by BEPS, implementing these disincentivization policies necessitates America having the freedom to shift its own corporate tax rate within the spirit of the agreement.
Despite the feasibility and universal acceptance of the Two-Pillar solution across the globe and even the domestic political spectrum, some critics argue it would stifle innovation and infringe on U.S. policy sovereignty. Only corporations with annual revenue exceeding $890 million would be targeted by this plan. Therefore, with the capital and market share these corporations already hold, their abilities to innovate would not be greatly decreased. Additionally, studies referenced in a University of Michigan paper found that generally 2-4% of a company’s revenue is actually affected by anti-BEPS regulations like the Two-Pillar plan, nowhere near enough of a corporation’s income to disincentivize innovation significantly. But the collective tax revenue accumulated by the American government would still be an impressive sum, allowing for more funding for vital infrastructure projects and social benefit programs. Moreover, the U.S. federal corporate tax rate has not been below 15%, the proposed global minimum corporate tax rate, since the 1930’s. Though the rate for corporations with an annual revenue exceeding $23.8 billion would fall between 20-30%, the U.S. Federal Corporate Tax Rate already floats around this number.
Ultimately, BEPS strategies significantly disadvantage the average American taxpayer to the benefit of immensely wealthy corporations. Issuing a global minimum corporate tax rate, as seen in the OECD agreement, would serve as an important step to stop this tax avoidance. However, allowing some leeway for American policymakers to shift tax policy in accordance with the spirit of the plan, as opposed to the letter, would allow America to pass meaningful BEPS disincentivization policies vital to maintaining the effectiveness of any global agreement.