In its efforts to generate more revenue to fund a massive infrastructure spending package, US President Joe Biden's administration is seeking to add more red tape to a corporate tax regime that already has too much of it. Fortunately, there is a perfectly sensible alternative.
BERKELEY – As part of its massive infrastructure plan, President Joe Biden’s administration is seeking to raise the US corporate tax rate from 21% to 28%, with a 21% “minimum” tax on profits earned abroad by US corporations. In the words of Secretary of the Treasury Janet Yellen, the goal is to arrest an international “race to the bottom” by getting other countries to adopt similar minimum corporate taxes.
Unfortunately, the measures being proposed seem designed for an earlier era, when it was easy to identify the factories and refineries where companies produced and earned their profits, and when a corporation’s nationality was largely determined by the location of its main operations and its shareholders. In the modern era, multinational companies with international shareholder bases operate global supply chains, creating value using intangible capital with no natural location. As such, trying to modify a tax system based on a company’s residence and where its profits are earned amounts to trying to replace the race to the bottom with a race to the past.
If the United States adopts the proposed measures but fails to get others to go along, it will have saddled itself with a less competitive tax system. But even if it succeeds, it will have locked in a system that will require constant modification to keep up with economic realities that are departing ever further from the core concepts on which the system is based.
BERKELEY – As part of its massive infrastructure plan, President Joe Biden’s administration is seeking to raise the US corporate tax rate from 21% to 28%, with a 21% “minimum” tax on profits earned abroad by US corporations. In the words of Secretary of the Treasury Janet Yellen, the goal is to arrest an international “race to the bottom” by getting other countries to adopt similar minimum corporate taxes.
Unfortunately, the measures being proposed seem designed for an earlier era, when it was easy to identify the factories and refineries where companies produced and earned their profits, and when a corporation’s nationality was largely determined by the location of its main operations and its shareholders. In the modern era, multinational companies with international shareholder bases operate global supply chains, creating value using intangible capital with no natural location. As such, trying to modify a tax system based on a company’s residence and where its profits are earned amounts to trying to replace the race to the bottom with a race to the past.
If the United States adopts the proposed measures but fails to get others to go along, it will have saddled itself with a less competitive tax system. But even if it succeeds, it will have locked in a system that will require constant modification to keep up with economic realities that are departing ever further from the core concepts on which the system is based.