By endorsing a worldwide minimum tax rate of 15% on enormous multinational earnings, the leaders of the world’s largest economies accomplished a pact that has subsequently gathered traction and pledges from leaders in 136 countries.
The deal’s goals are straightforward. It establishes a tax cartel, which high-tax countries believe will reduce competition from countries with lower and simpler taxes. It also advantages wealthier, higher-tax countries by moving earnings from countries where businesses are headquartered to countries where they sell their products.
The following are the basics on a global minimum tax: Most countries utilize a “territorial” system, including the United States since the adoption of the Tax Cuts and Jobs Act in 2017. Territoriality is a fundamental premise of sound fiscal policy, implying that governments do not tax their citizens’ foreign-earned income. Instead, the foreign authorities where the money is earned tax it. Companies can decide where to do business based on which country has the most favorable tax environment. This strategy puts pressure on countries with harsh tax policies to relax them.
High-tax countries dislike this rivalry, which is why they’ve been clamoring for a global minimum tax for the past decade. While the new regime will help the US government greatly, it will not benefit US enterprises with foreign subsidiaries and income.
The intriguing thing is that some proponents don’t hide the fact that their purpose is to simply take more money from corporations. Lawrence Summers, an economist and former Treasury Secretary, praised the new accord in a recent Washington Post article:
“Countries have come together to make sure that the global economy can create widely shared prosperity, rather than lower tax burdens for those at the top. By providing a more durable and robust revenue base, the new minimum tax will help pay for the sorts of public investments that are fundamental to economic success in all countries.”