Frightening Figure 1:

In recent years Americans have paid more than twice the world price for sugar. Based on sugar deliveries for domestic use in 2020/21, the difference between paying the world refined sugar price of 17 cents per pound or paying the Bodog Poker U.S. refined beet sugar price of 42.1 cents per pound is nearly $6.2 billion in higher costs for American sugar users.

As supply chain problems continue to disrupt the economy, some have suggested that the solution is to bring production back to the United States. For example, according to President Joe Biden, “We need to invest in making more of our products right here in the United States. Never again should our country and our economy be unable to make critical products we need because bodog poker review we don’t have access to materials to make that product.”

A more effective approach would be to remove trade barriers that reduce the ability of U.S. producers to create resilient supply chains and access critical inpus from abroad. Christine Lantinen, the owner of Maud Borup candy, recently testified: “Let me put this simply: the U.S. Sugar Program, a collection of policies written and implemented by Congress, creates supply chain shortages for businesses that need sugar to make bodog poker review their products. If we want to address global supply chains and small business trade challenges, this is a good place to start.”

She’s exactly right. Instead of attempting to replicate the costly sugar program in other sectors of the economy in order to repatriate supply chains, the Biden administration should drive a stake through the heart of policies that prey upon Americans looking for affordable sugar, steel, aluminum, fertilizer, and other products whose supply bodog online casino is restricted by unfair U.S. trade barriers. 

Bryan Riley is Director of NTU’s Free Trade Initiative.

To read the full commentary from the National Taxpayers Union Foundation, please click here.

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In June, leaders of the Group of Seven (G7) countries, including President Joseph R. Biden Jr., adopted the goals of a global minimum corporate tax rate of 15 percent and reallocation of a fifth of profits above a 10 percent threshold (called Amount A in the OECD’s blueprint) earned by large MNCs to the country where goods and services are sold, rather than the country where they are produced.

While the bulk of cross-border economic activity is subject to binding multilateral treaties enforced by international organizations such as the World Trade Organization (WTO), there is no “world tax organization.” No attempt has ever been made to establish one. Therein lies a major problem in forging an agreement involving international organizations like the WTO and the International Monetary Fund (IMF).

History teaches that governments are jealous of their taxing powers. Within the United States, for example, state governments reject any suggestions that they should harmonize local tax bases or rates. Within the EU, national legislatures write the tax laws, and a common approach is limited to value added taxes (VATs), easing the movement of goods across borders. Given this experience, international institutions must tread lightly.

The OECD has been working since 2013 to develop the two proposals on global tax alignment. But OECD membership numbers only 38 countries, predominantly well-off nations, of which at least three (Estonia, Hungary, and Ireland) do not yet support the proposals. Going forward, international institutions with broader membership—like the IMF and the World Bank—seem better placed to advance international tax proposals.

The IMF has good expertise to illuminate important aspects of both proposals. The place to start is with the proposed 15 percent global minimum. Light can be shed on G7 tax practices that erode headline corporate tax rates below the 15 percent target. For example, the US Congress is now debating a 25 percent refundable tax credit for semiconductor investments. If enacted, this measure will likely reduce the effective tax rate below 15 percent for key firms. More troubling is the existence of multiple “passthrough” entities in the US tax code, such as Subchapter S corporations and limited liability companies (LLCs). These firms pay no corporate tax, yet account for about half of US business revenue. Whether their lighter tax burdens would run afoul of an international tax agreement is an open question at this stage.

Similar practices flourish in the tax codes of France, Italy, Germany, Japan, and the UK. Moreover, the UK is seeking to exclude financial firms from the G7 tax-sharing proposal, thereby protecting a key industry in the City of London. If the IMF shines light on such practices, that may prompt some G7 countries to clarify and reach agreement on their declared minimum.

Of course, when the G7 countries—including Canada, France, Germany, Italy, Japan, the UK, and the US—declared a 15 percent global minimum, they were mainly not thinking about their own tax credits, exemptions, or subsidies. Their aim was to change the policies of the 35 low-tax jurisdictions, predominantly tiny economies, listed here. Together, these jurisdictions have about 100 million citizens, a third of them in Uzbekistan. Several of these countries enacted low headline corporate rates to attract foreign direct investment from MNCs and a slice of global value chains, thereby creating high-wage local jobs. For these countries, implementing the 15 percent minimum rate may reverse the process and cost local jobs, as well as local personal tax and VAT revenues. The IMF could assess those outcomes, particularly for medium-sized countries like Bulgaria, Hungary, and Ireland.

Moreover, the US Treasury has proposed a “top-up” tax that would deprive US MNCs of tax benefits of locating activity in low-tax jurisdictions. If enacted, top-up taxes could have significant adverse effects on low-tax economies. Besides assessing such possibilities, the IMF could suggest alternative development and fiscal approaches for affected countries.

Turning to the reallocation proposal, if headquarter countries of the largest MNCs—essentially the G7 countries—will submit the tax and accounting returns of these firms to the IMF, then the Fund could act as the “honest broker” both in determining which MNCs are covered and in allocating some of these tax revenues to the place of sale. Without an honest broker to perform these services, multiple disputes and litigation between MNCs and countries are certain to become even more contentious than they would otherwise become.

Some of the low-tax jurisdictions that lose out from implementing the 15 percent global minimum may gain revenue from the reallocation. This is another area where analysis is needed beyond what the OECD has done to motivate these proposals. The OECD has estimated some aggregate numbers as to how much more tax might be collected from MNCs, but this analysis can be followed by further calculations on which countries would gain and which countries would lose, and how much in each case. However, even if G7 economies accept Amount Ain principle, it may take years for the reallocation to be written into national tax laws.

In the meantime, some low-tax countries may suffer not only from the net loss of tax revenue but also from the loss of MNC jobs. With that possibility in mind, the World Bank, together with the regional development banks, can explore the need for extending budget support to their severely affected members.

Simeon Djankov is a senior fellow at the Peterson Institute for International Economics. Prior to joining the Institute, Djankov was deputy prime minister and minister of finance of Bulgaria from 2009 to 2013.

Gary Clyde Hufbauer, nonresident senior fellow, was the Peterson Institute for International Economics Reginald Jones Senior Fellow from 1992 to January 2018.

To read the full commentary from the Peterson Institute for International Economics, please click here.

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According to the US Congressional Research Service, current estimates show the Coronavirus reduced global economic growth to an annualized rate between -4% and -6% in 2020. Global trade is also estimated to have reduced by -5.3% over 2020.  

Following on from a year in which global GDP was so heavily impacted, the proposal of a cooperative global corporation tax agreement –  which if successful would be the first of its kind – is gaining significant interest. 

In a year of extreme national spending, with continued uncertainty, it becomes understandable for a global tax agreement to attract attention. The OECD is believed to be discussing the matter positively, with Mathias Cormann, Secretary-General of the OECD referring to the proposal as a “game-changer”. He went on to state he was “quietly optimistic” about an international agreement on the taxation of multinational corporations.

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The pandemic caused recessions globally, and the above figures are believed to have been much worse if not for the substantial levels of government support seen across the world, specifically in developed nations. The National Audit Office for the UK states that between February of 2020 and 31^st of March of 2021, the UK Government expects a total of £372 billion to be spent on Covid-19. 

The US has spent a total of $2.8 trillion, of the initial $4.5 trillion made available in early 2020 through the Coronavirus Aid, Relief, and Economic Security (CARES) Act. 

Such large sums of money have had significant impacts on the country’s finances, as the balance increased spending/ borrowing with reduced taxation income. According to the IMF/CRS, Government fiscal deficits relative to GDP were as high as 10.8% for the world economy in 2020, with projections of 5.4% by 2022, which is still comparatively high. To add context, the Parliament Library states that the UK’s average annual fiscal deficit has been 3.6% since 1970. 

With nations fiscal deficits at these levels, it is again understandable that a proposal of a corporation tax floor of 15% is palatable, with prospects of increased governmental revenues as a result of the plan. 

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At the G7 Summit, located this year in Cornwall, there were discussions specifically around global taxation programmes. US President Biden is believed to have driven said talks, with the resulting proposal of a global corporation tax floor of 15% being agreed to by the Finance Ministers of the G-7 nations. This 15% floor is to eliminate the under-cutting of nations. 

It is important to understand that much of what governments around the world spent to support their respective economies over the past 18 months, was borrowed. For more information on the UK’s borrowing and debt levels, and the costs of such, see TFG’s article on the 2021 UK Spring Budget. 

Given the high debt ratios and borrowing levels, it becomes inevitable that countries will have to increase different forms of taxation to counterbalance the need for borrowing in 2020. This is where US president Joe Biden’s proposal comes in – the theory goes that if all countries have an agreed floor of corporation tax, when nations increase taxations, the corporations will be less likely to ‘move’ their business abroad to benefit from tax reliefs. 

Current Global Taxation

There are two main elements to the agreed global corporation tax – firstly, countries which consume the goods/ services of the most profitable multinational corporations will be entitled to tax said corporations. Secondly, all participating countries impose a minimum corporation tax floor on the global income of multinational corporations. 

The proposed 15% corporation tax floor figure, will apply to multinational corporations in each individual country – eliminating the process of moving profits into ‘tax-havens’ through subsidiaries. 

As of 2021, all 7 members of the G7 have higher corporation tax rates than the proposed floor (Canada 26.5%, France 28%, Germany 15.8%, Italy 24%, Japan 30.6%, US 21% and the UK 19%). This proposal is then toward the world’s economies. 

Currently, Country A may have offices and sell product in the US, buy parts and sell product to China, but move profits through legitimate processes into accounts in, the British Virgin Islands for example, in which there is no corporate income tax. Some tax havens do not require a person’s residency, nor any business activity to allow said business to register and pay that countries tax requirements (or lack thereof). 

The end result is some of the largest corporations in the world actually pay relatively small amounts in tax. Amazon for example, has paid an effective US federal tax rate of 3% on profits totalling $26.5 billion from 2009-2018.  Apple filed an effective global tax rate of 14.4% on financial statement profits for 2020 – lower than the 21% stated above, illustrating the benefits of international tax initiatives. 

The newly proposed global tax agreement would mean that companies that qualify for the above criteria would then pay tax in countries which consume the goods/ services. With the above example of Country A, they would then be subject to taxation from the US and China (should China join the agreement) as their good is also consumed in China. 

Reuters reported that Alphabet Inc., the parent company of Google, could see their global tax bill increase by as much as 7% on it’s $7.8billion global bill in 2020. 

Will it work? 

There are multiple caveats to this proposal, and a lot of moving parts that would need to contribute to the successful implementation of such a global programme. Firstly, there will be countries that do not agree with this proposal and, therefore, will not implement it. 

For a price floor of any kind to work, by definition you need full participation. Within a single country, this may be ensured through laws/ regulations. Implementing this on a global scale is then difficult, as some nations may choose to keep their tax requirements ‘attractive’ which would lessen the efficacy of the programme. 

Secondly, the announcement of this global tax agreement is applicable to roughly the largest 100 companies with profit margins over 10%. How this then gets concretely defined and agreed, is still up for debate. To use Amazon as another example – in 2019 they reported a net income of $3.6 billion, and $4.4 billion of operating profit, which represented a profit margin of just over 7%. Would Amazon therefore not be subject to the new tax responsibilities, despite operating in 58 countries (as of 2018) and being ranked 10^th on the Forbes list of the world’s wealthiest companies? 

There is also a question of who this benefits. Recalling the coincidental time of this announcement, the fact that many nations will be looking to increase taxation revenues over the coming years, some speculate that this is a method that would benefit larger economies more. 

Ross McKenzie is currently a full-time Business Analyst and part-time writer for TFG. Having studied Economics at University, he is particularly interested in global currency movements, international political relations and macroeconomic policy implications.

To read the original commentary from Trade Finance Global, please visit here.

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The latest development in the effort to change global corporate tax rules came in June in London. It occurred in separate sessions where Treasury Secretary Janet Yellen and later President Joseph R. Biden Jr. joined with other Group of 7 (G7) leaders to establish an “historic” deal to redesign the world tax system. Their next task is to present the deal to the full complement of G20 countries in Venice in July. After that session the deal goes before the 135 countries that have participated from a distance in the tax talks sponsored by the Organization for Economic Cooperation and Development (OECD). There the deal may encounter rough patches with several dozen small countries heavily invested in the status quo.   

The OECD’s “Inclusive Framework” project rests on two goals. The first (called “Pillar One”) calls for big corporations, especially the digital giants, to pay some form of tax to the countries where they market or sell their goods and services. “Pillar Two” would entail an agreement on a global minimum 15 percent corporate tax rate for corporations established in each country.  Pillar Two will not require any increase in G7 tax rates because they are already at 15 percent or higher. Nor will it require any of the G20 members to raise their basic corporate rates. But besides Ireland, well known for its 12.5 percent rate, there are another 34 low-tax and zero-tax jurisdictions outside the G7 and G20 – mostly small countries – at rates below 15 percent (see table). Nine additional jurisdictions, including Albania, Georgia, Lithuania and Serbia in Eastern Europe, Iraq, Kuwait and Oman in the Middle East, and Mauritius and the Maldives among small island states, have a 15 percent corporate tax rate.

But will an arrangement to reach a 15 percent minimum stick? When pressed to raise their corporate rates, some members of this low-tax group argue that they could lose the ability to attract firms, since they lack an equivalent array of resources, markets, or subsidies that large nations can offer.  If the low-tax countries are eventually forced into adopting the 15 percent minimum headline rate, they may adopt workarounds. They could, for example, legislate new deductions or tax credits as offsets.  If  all the G7 countries were to adopt “make-up” taxes on their multinational corporations (MNCs) that eliminate the advantage of moving intangible income (mainly royalties) to low-tax countries, it may not  make that much difference if some jurisdictions use other methods to lure corporations to do business within their borders or provide low-tax export platforms.   

Pillar One would require some portion of the earnings of the largest multinationals—perhaps 100 firms, especially those known as GAFA (Google, Apple, Facebook, and Amazon)—to be taxed in the country where goods and services are sold. These taxes would be in lieu of taxes paid in the country where the goods and services are produced (the practice under current international tax rules).  Hammering out the main parameters, G7 finance ministers agreed that 20 percent of profits above a basic 10 percent rate of return should be allocated to the country of sales.  This is called Amount A. Thorny details remain to be agreed, not only among the G7 but also among the G20 and countries at large, as to the details of Amount A.  Which large corporations will be covered by the new rules?  What accounting standards will be used for the 10 percent threshold?  How will above-threshold digital profits be divided between countries? 

The potential consequences for the low-tax countries listed in table 1 of a 15 percent global minimum tax rate coupled with reallocation of Amount A between countries are a matter of speculation. For a handful of low-tax countries that have acquired tax haven reputations, the 15 percent global minimum would probably entail the loss of vast book assets.  These legally parked assets yield small incidental tax revenues (stamp duties and the like) and create employment for skilled professionals such as financiers, lawyers, and accountants.  Jurisdictions affected by such losses would include the Bahamas, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Cyprus, Guernsey, Isle of Man, and Jersey. These jurisdictions should, however, experience some revenue gains if they chose to tax the locally allocated share of Amount A from the largest MNCs. But such gains would probably be small, because resident populations are a minor share of world population. 

A second group of low-tax countries have succeeded in attracting significant multinational corporation employment for production and service workers, partly through low corporate rates.  Countries in this category include Bahrain, Bulgaria, Hungary, Ireland, Liechtenstein, Macao Special Administrative Region of China, Montenegro, Northern Macedonia, Serbia, and the United Arab Emirates.  If they accept the minimum 15 percent rate, these countries will probably explore alternative fiscal incentives to retain local employment.  Again, the reallocation of Amount A may lead to some local revenue gains, but those gains might arrive later than the threat to local employment, simply because it will take time to work out Amount A details.

In sum, without G7 legislation that imposes “make-up” taxes on multinational corporations that book profits in low-tax countries, it will be difficult to persuade many of the countries listed in the table below to adopt the new global minimum rate. For this reason, the G7 proposal must surmount some serious obstacles before it is adopted and changes the landscape of international tax rules. 

To read the full commentary from the Peterson Institute for International Economics, please click here.

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This trade is carried out both through unofficial crossings (where goods are smuggled across the border) and over official border points – where goods are not declared. Considered a legitimate source of livelihood this trade not only supplies the borderlands, but is also a vital supply line for the wider region.

Different reasons account for the informality of cross border trade. These include cumbersome border procedures, shortages of particular commodities on either side of the border, and different taxation levels (with the consequent price difference offering attractive margins for smugglers). Added to these is corruption, and harassment of traders by state officials. For these reasons many traders avoid border controls altogether.

Uganda’s central bank has been collecting data on undeclared goods passing through official border points. Between 2010 and 2018, Uganda’s informal exports to the DRC nearly doubled, from US$ 143.2 million to US$ 269.8 million. Given that formal exports to the DRC for those years respectively were US$ 184 million and US$ 204 million, these figures highlight the importance of informal cross-border trade.

The COVID-19 pandemic has disrupted cross-border mobility worldwide and its policy consequences are therefore particularly visible around borders.

But, what has been the impact of the pandemic on informal cross-border trade along the Uganda-DRC border? Our new research in a number of key border points found that cross-border trade has been severely affected, with knock-on effects on various aspects of lives far beyond the borderlands. For example, as north-eastern DRC largely depends on imports from Uganda for much of its commodities (such as salt, sugar or soap), their supply in basic goods was strongly affected.

However, we also found that players in the informal trade adapted to various changing COVID-19 policies and contexts, including differences in pandemic responses in Uganda and DRC.

COVID measures

Uganda has imposed some of the strictest COVID-19 lockdown rules in the world. At the start in March, 2020, Uganda ordered a stay-at-home lockdown and the closure of all its borders – except for cargo truck drivers. Soon after, it suspended all public transport and non-food markets, and a nationwide curfew.

This led to a severe disruption in supply and distribution channels – both formal and informal. Uncertain supplies and speculative behaviour led to increasing and fluctuating prices throughout the borderlands region.

In order to reduce risk, most informal traders deal in a variety of items. These traders adjusted in a variety of ways. As the initial ban in Uganda excluded food markets, traders would shift from nonfood to food items. Yet, particularly in the initial phase of the lockdown, this was not easy, as it remained difficult to transfer goods across the border.

Second, the cost of trading increased as truck drivers had to undergo screenings leading to long waiting times. Formal exports and imports were “slowed down or completely halted by the COVID-19 restrictions.” This had a range of impacts, such as the loss of perishable and short-life items due to the restrictions on demand and supply.

Border areas are traditionally vulnerable to economic, political and mobility-related shocks. Cross-border trade run mostly by small-scale traders with fragile supply chains is especially prone to insecurity and upheaval.

The COVID-19 control measures in Uganda therefore had a severe impact on informal cross-border trade. Many traders lost merchandise, such as agricultural produce or livestock, that they were unable to sell. This led to increased financial stress among informal traders, who then often relied on informal loans, resulting in spiralling debt.

Surviving COVID-19 restrictions

While Uganda employed a heavy-handed approach, with the military shutting off official and unofficial border crossings, this was not the case on the Congolese side of the border. Congo’s president did announce the closure of the country’s borders and a state of emergency in March 2020. But these directives remained largely ineffective with Congolese authorities making no effort to limit crossings.

This allowed some limited opportunities for informal cross border trade. For example, while markets were forcibly closed on the Ugandan side of the border, they remained open on the Congolese side. As a result, many small-scale Ugandan traders shifted to the DRC to reside there. Many were unable to return due to the closed border, and often stayed in precarious conditions.

To move goods across the border, traders on either side of the border would pay truck drivers to transship goods. Overall, these were fairly small quantities, but still allowed traders to survive. But there were risks too. Traders complained about being duped or shortchanged by truck drivers entrusted with moving or sourcing goods. For example, a driver entrusted with buying Congolese coffee for sale in Uganda may deliver inferior quality beans.

Moreover, traders complained that Ugandan security officials were more vigilant in levying trade taxes but also irregular “foreigner taxes”, more so in the Rwenzori border region.

Informal trade is here to stay

Many COVID-19 border restrictions for traders in Uganda have now been lifted. In theory, travellers need to present a COVID-negative test issued no more than 120 hours before travel – but in practice this is not enforced for small-scale traders. Most security personnel have also been withdrawn from unofficial border crossings, through which cross-border mobility has improved again.

In sum, our research  demonstrates once more how informal border trade is a historically grounded reality, constituting an important source of livelihood, and supplier of goods, for many far and beyond. Formalisation of these dynamics should therefore not be seen as the solution, as it will threaten trade operations and endanger the economic viability of border communities.

Instead, what is key here is improving the trade environment for these traders. This can be achieved by tackling various other financial and non-financial obstacles, such as harassment by security officials. Doing so will help to deepen regional integration and foster development in these border communities.

To read the original blog by the The Conversation, please click here.

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But the effort drew the ire of Amazon, which did not pay a dime in corporate tax to the U.S. federal government or its home state of Washington that year. The company spearheaded a business coalition that quickly raised more than $300,000 to lobby to overturn the new tax. Amazon announced that it would halt construction on a downtown office tower and sent a clear signal that it was prepared to move jobs out of Seattle. With the fight coming in the midst of the much-publicized bidding war among states to offer Amazon the biggest tax breaks for its project to build a second headquarters, the message was clear: If Seattle raised taxes on Amazon, the company could find friendlier places. Less than a month after passing the measure, Seattle’s City Council voted 7-2 to drop the new tax.

Seattle’s tax fight might seem like a local story, but it is now being waged on a much larger stage. U.S. President Joe Biden has proposed a significant increase in corporate taxes to pay for his $2.3 trillion American Jobs Plan, which would fund a massive boost in infrastructure across the country. Polls show funding the infrastructure bill through the increase in corporate taxes is highly popular, with two-thirds of voters approving. If he succeeds, Biden could reverse a decades-old trend in which corporate taxes go down but never go up, starving governments of badly needed revenue.

But like Amazon in Seattle, U.S. companies still have an ace in their pocket: They can vote with their dollars by moving investment, jobs, and profits offshore to lower-tax jurisdictions. That threat is the main reason corporate taxes have been falling around the world for decades. In 1980, corporate tax rates averaged more than 40 percent; by 2020, that average global rate had fallen by nearly half to less than 24 percent. The United States, which had not cut its corporate taxes since the mid-1980s, finally followed suit in 2017, when then-President Trump signed a bill to reduce the top U.S. corporate rate from 35 to 21 percent. Biden is now proposing to push it back up to 28 percent and to close loopholes that allow many large companies to avoid paying anything close to the headline rate. The plan is expected to raise $2.5 trillion over 15 years, more than enough to cover the rebuilding of roads, bridges, and schools and the expansion of high-speed broadband called for in Biden’s infrastructure bill.

The global front is where the fight to tax companies truly gets interesting. Assuming Biden can get the tax increase through the U.S. Congress—far from certain in the face of Republican opposition—the only way he can discourage the sort of capital flight blackmail that Amazon used to cow the Seattle City Council is to get the rest of the world to go along. That is exactly what the administration is now trying to do. And after decades of falling corporate taxes, the chances of success have never looked better.

Global tax avoidance has become the norm for many of the world’s wealthiest companies.

Earlier this month, U.S. Treasury Secretary Janet Yellen threw her weight behind the idea of imposing a global minimum tax on corporations, calling for an end to “a 30-year race to the bottom on corporate tax rates.” For the first time, the United States is genuinely embracing proposals from the Organization for Economic Cooperation and Development (OECD) to create a united front aimed at stopping tax-dodging corporations from playing one nation off against another. “The tax plan incentivizes the whole world to give up the game,” Yellen said.

Global tax avoidance has become the norm for many of the world’s wealthiest companies. As the engine of the economy has shifted from physical goods to digital transactions, the foundations of decades-old agreements on global tax cooperation have crumbled. The international regime on corporate tax dates all the way back to the ill-fated League of Nations in the 1920s, which established norms that based taxation on a company’s place of domicile and protected corporations against double taxation, by which multiple governments might levy taxes on the same income. The United States long ago extended these safeguards by allowing companies to defer indefinitely the payment of tax bills on overseas income.

Those measures were designed to protect companies against predatory governments; today, the problem is the reverse—governments must find a way to protect their revenue base against predatory companies. Technology, pharmaceutical, and other companies where intellectual property is the most valuable asset and physical location matters far less have become especially adept at such maneuvering. Today, seven of the top 10 locations for U.S. multinationals’ profits are tax-haven countries, including Bermuda, the Cayman Islands, Ireland, Luxembourg, and the Netherlands. While some of these places, such as Ireland, host actual corporate offices and production facilities, most of these are simply convenient addresses for reporting profits earned elsewhere and thereby escaping taxes. That has resulted in some bizarre financial anomalies—Luxembourg, with a population of 600,000, receives as much alleged foreign direct investment as the United States, and far more than China. Much of it consists of funds routed through Luxembourg entities for tax-minimization purposes.

To reverse this decades-old trend, the Biden administration is pushing for a new global minimum tax rate of 21 percent, which is still well below the proposed 28 percent U.S. rate. In practice, that would mean that a U.S.-headquartered company booking profits in tax-free Bermuda would be hit with a 21 percent tax bill from the U.S. government, while those booking in low-tax Ireland with its 12.5 percent rate would have to make up the difference. Finance ministers from the G-20 economies are negotiating a pact, with the goal of reaching an agreement in June. Most European nations are already onboard, a consequence of nearly a decade of work through the OECD and the European Union’s own efforts to crack down on tax avoidance within the bloc. Getting over the finish line will not be easy. Sticking points include how high to set the global minimum rate and how to treat the digital giants, where the Europeans want to take a bigger bite of the European profits earned by U.S. companies such as Apple, Facebook, and Google. The Trump administration threatened France and others with trade sanctions over the issue, but the Biden team favors higher taxes as long as they do not single out U.S. digital companies.

There are certainly good reasons to bet against success. In the Republican-led tax reform of 2017, Trump promised that he would crack down on companies dodging taxes abroad and that cutting the headline tax rate from 35 to 21 percent would attract a flood of investment to the United States. Instead, despite strong growth in fiscal year 2018, corporate tax revenues fell by 31 percent that year, the largest ever annual drop, and there was no appreciable increase in foreign investment.

Biden’s legislation is trying to avoid those pitfalls. Recognizing that other countries may be reluctant to sign on to a global minimum tax, his proposal would put muscle behind that proposal by denying tax deductions to companiesthat send payments to entities in low-tax jurisdictions, and he would do the same for countries that refuse to adopt a global minimum tax rate. The administration is also determined to mend relations with allies, of which Germany and France, in particular, are eager to get across the finish line with tax negotiations. The new Biden proposals have been greeted warmly even by countries such as the Netherlands that benefit from the current system. No less a realist than former U.S. Treasury Secretary Larry Summers told the Council on Foreign Relations last week that Yellen’s proposal was “a strong approach” with “a good chance of success.” It was time, he said, “to bring the issue of tax cooperation to the top table, where it’s never been before.”

U.S. companies, naturally, are pushing back, and the tax fight will be a test of how much sway they hold in Biden’s Washington. The Business Roundtable, an organization of American CEOs, said the higher corporate tax “would make the United States uncompetitive as a place to do business and make U.S. companies uncompetitive globally.” In a survey of the group’s corporate members, 98 percent said it would hurt their competitiveness. But the corporate positions are more nuanced than this opposition would suggest. Companies worry about their relative positions; if a foreign competitor enjoys a tax break or subsidy they are denied, that could pose a serious disadvantage. Instead of outright opposition to a global minimum tax, the Business Roundtable said that any U.S. minimum should be set through international agreement and aligned with other countries.

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International corporate taxation has long presented a challenge for tax authorities around the world. The emergence of globalization and intangible capital in recent decades has made taxing multinational corporations (MNCs) increasingly difficult, and greater international cooperation is needed to make such taxation more effective. A global minimum tax on profitable MNCs would ensure that a baseline level of revenue is collected from them. Although this tax would not solve all problems related to corporate tax avoidance and evasion, and its design and implementation need careful consideration, it would be an important and helpful step.

The evolution of MNCs’ structure and behavior pose dilemmas for governments. Should MNC profits be taxed in the jurisdiction(s) where economic activities and value creation occur, or where these entities are technically headquartered? How should corporate subsidiaries and difficult-to-value assets such as patents be handled? These types of questions—alongside competing priorities like revenue collection, global competitiveness, and tax efficiency—illustrate the difficult task at hand for the global community.

In today’s economy companies can easily invert their structure and shift profits to tax havens, and intangible capital (e.g., software) is more difficult to precisely value and locate compared with tangible capital (e.g., a factory that produces physical goods). Countries have competed against one another for corporate investment, leading to a race to the bottom as statutory corporate tax rates have continuously fallen globally for forty years. In 1980 the worldwide average statutory corporate tax rate was around 40 percent, as compared to around 24 percent in 2020.

Additionally, the number of tax havens has increased. And effective corporate tax rates are even lower than statutory rates given the proliferation of loopholes. In 2021, the British Virgin Islands, the Cayman Islands, Bermuda, the Netherlands, Switzerland, and Luxembourg were ranked the “jurisdictions most complicit in helping MNCs underpay corporate income tax.” There is significant corporate tax revenue at stake in all this; it is estimated that governments miss out on between $200 and $600 billion in revenues each year (around 10 to 15 percent of annual global corporate tax revenues).

Most economies utilize some version of a worldwide or territorial tax system. In a worldwide system, domestic and foreign corporate income is taxed. To prevent double taxation, resident corporations can claim a tax credit to offset some or all of the foreign income tax they have paid. In a territorial system, corporate taxes are only paid on income that is generated within the country’s jurisdiction. Most advanced economies have adopted territorial systems.

The United States used a worldwide system until 2017, when the Tax Cuts and Jobs Act (TCJA) moved the country to a hybrid model closer to a territorial system. The TCJA featured several notable changes such as the removal of a tax on repatriated dividends from the foreign subsidiaries of US MNCs, a minimum tax on the intangible profits of US companies’ foreign subsidiaries, and a one-time transition tax on past profits of foreign entities belonging to US MNCs. Despite these changes, US MNCs have continued shifting profits to tax jurisdictions with lower corporate tax rates, in part due to the law’s design. Globally, the magnitude of tax maneuvering is so large that macroeconomic data is distorted via “phantom investments,” where large Foreign Direct Investment figures don’t reflect economic activity but rather empty corporate shells fashioned to lower tax bills.

To address this problem, the Organisation for Economic Co-operation and Development (OECD) and Group of Twenty (G20) have been leading the Base Erosion and Profit Shifting (BEPS) initiative—a multilateral negotiation with over 135 countries, including the United States—since 2013. (It’s these negotiations that Yellen was referencing in her remarks.) A global minimum tax is now one of the two central pillars of the BEPS initiative alongside a separate proposal to tax technology MNCs in part based on where their users are located. The debate over a digital-services tax was at the heart of transatlantic tensions last year involving unilateral tax and tariff measures. A specific global minimum tax has not been agreed to, but the basic framework of how one would work involves a “top-up” tax.

As an example, assume Country A has a corporate tax rate of 20 percent and Country B has a corporate tax rate of 11 percent. The global minimum tax rate is 15 percent, and Company X is headquartered in Country A but reports income in Country B. Country A would “top-up” the taxes paid on profits earned by Company X in Country B in a manner equal to the percentage-point difference between Country B’s rate of 11 percent and the global minimum of 15 percent (e.g., Company X would pay in taxes an additional 4 percent of profits reported in Country B). This approach would set a floor on the collection of global tax revenue and help alter corporate incentives because companies would know that profits shifted to tax havens would face incremental taxation. It would also provide transparency on corporate tax practices since enforcing a global minimum tax would require country-by-country reporting of corporate activities.

Countries have also proposed incentives to persuade lower-tax countries to join the agreement, including denying certain tax deductions on income earned in a country that does not adhere to the minimum tax rate. The OECD has released high-level revenue-impact estimates, which assume a 12.5 percent global minimum tax rate, and found significant revenue gains for countries at all income levels.

Momentum for a global minimum tax stalled last year, partially due to roadblocks from the Trump administration, but it has returned of late. The OECD is targeting mid-2021 to reach an agreement on a global minimum tax, and the International Monetary Fund and the United Nations Panel for International Financial Accountability have recommended the measure as well. This timing also aligns with the Biden administration’s push for a global minimum tax as a part of its overall corporate tax reform proposal, intended to help pay for the significant investments outlined in the American Jobs Plan.

While a global minimum tax has high potential, in practice it is unquestionably complicated. Which countries will agree to it? How will reporting work? What counts as taxable income and which deductions should be included? Can countries enforce this? Some businesses are concerned about hits to their competitiveness from possible double taxation and increased compliance costs, and some tax experts question how efficient and effective a global minimum tax would be.

Some aspects of these reservations make sense. And because of widespread abuse and advanced sheltering techniques, a global minimum tax will not on its own deter all corporate tax avoidance and evasion.

Nevertheless, it is still worth trying to enact a global minimum tax. Once a system is in place, it will be easier to adjust the tax as needed to be more effective. Plus, with such a low cost of capital there is good reason to think corporations will be able to adjust their investment decisions without too much difficulty. Many MNCs are already preparing for and prefer a global standard compared to country-by-country proposals.

An agreement of this nature would be unprecedented and lay down an important marker for the future of international corporate taxation. Given the trend of decreasing corporate taxation, the scale of lost revenues, and the need for resources as the world tackles challenges such as climate change and recovery from the COVID-19 pandemic, complexity and potential imperfection should not prevent action.

Jeff Goldstein is a director of strategy and consulting at Fidelity Investments. During the Obama administration he served as the deputy chief of staff and special assistant to the chairman of the White House Council of Economic Advisers. He also worked at the Peterson Institute for International Economics. The views and opinions expressed in this article are strictly his own.

To view the original article by the Atlantic Council, please click here. 

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Since 1994, when NAFTA took effect and one year before the WTO was created, average world tariffs have fallen by nearly 70 percent.^[3] 

However, from 1994 to 2019 the United States also added 36.8 million new jobs. More than half of these new jobs were filled by Black and Hispanic workers, including nearly 18 million net new jobs for Hispanic Americans and 7.2 million net new jobs for Black workers.^[4] 

From 1994 to 2019, average real hourly earnings for Hispanic workers increased by 25.2 percent as average real hourly earnings for Black workers increased by 17.5 percent. The earnings gap between these two minority groups and White workers was smaller in 2019 than it was in 1994.

In contrast to suggestions that U.S. manufacturing has declined due to imports and outsourcing, real manufacturing output actually increased by 55 percent from 1997 to 2019.^[6] Before the pandemic, U.S. manufacturing layoffs had been declining ever since 2001, the first year for which layoff statistics are available.^[7] 

Manufacturing job losses were overwhelmingly driven by technology, the opportunity for workers to move up to better jobs, and increases in the productivity of manufacturing workers, not by trade.^[8] For example, the average manufacturing worker’s productivity doubled from 1990 to 2019, meaning fewer workers could produce more goods.

Even so, the trend toward lower manufacturing employment reversed course in 2010. From 2010 to 2019 the United States added nearly 1.4 million new manufacturing jobs.^[10] 

In addition to helping create millions of new, higher-paying jobs during the NAFTA/WTO era, international trade has reduced the cost of living for American workers and their families. For example, clothing is more affordable now than it was in 1994, after adjusting for inflation and quality factors, a change that benefits nearly all Americans.^[11] The same goes for telephones, TVs, toys, and many other goods.

U.S. import taxes are regressive, meaning they disproportionately damage people with low incomes. A 2017 analysis by three former Obama administration economists, including the former Chairman of the Council of Economic Advisers, concluded: “Tariffs – taxes on imported goods – likely impose a heavier burden on lower-income households, as these households generally spend more on traded goods as a share of expenditure/income and because of the higher level of tariffs placed on some key consumer goods.”^[12] Therefore reducing import tariffs is a progressive tax cut, with more benefits flowing to workers who earn less.

The record is clear: Trade has helped Black and Hispanic workers, who, not coincidentally, enthusiastically support trade. According to a 2017 Pew Research Center survey, large majorities of Black and Hispanic Americans think free trade agreements have been a good thing for the United States. Both groups were more likely to say that their financial situation has been helped by free trade agreements than hurt by them.^[13] 

The incoming Biden administration should strive to build on the benefits Americans have enjoyed as a result of declining global trade barriers. Specifically, the United States should do more to help Americans of all backgrounds by reducing import taxes on shoes, clothing, and other products that families need, while also cutting tariffs on imported inputs used by manufacturing workers to compete in the global marketplace.

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