In April, the Biden administration made history with a proposal to tackle one of the most pressing moral and economic challenges facing the world economy: the rampant tax avoidance of multinational corporations in tax havens. Corporations “offshoring” profits is estimated to cost governments around the world over $245 billion annually, as companies shift $1.38 trillion out of their home countries and into tax havens like Luxembourg or the Cayman Islands.
The specific mechanism that Biden announced is simple but ambitious: as part of the American Jobs Plan (AJP), the administration has called on every country to charge at least a 21 per cent corporate tax on the income of US multinational corporations earned in their borders. If countries choose not to, the US can and will collect the difference. The US Treasury estimates the minimum tax will bring in over $500 billion for the US over a decade. This so-called “global minimum tax” is still lower than the proposed increase of the corporate tax rate to 28 per cent in the US and 25 per cent in the UK. But it will eliminate the incentives for companies to stash their cash in tax havens like Andorra or Bermuda solely because the country charges less than half the OECD average rate. In response to concerns, the administration has indicated a willingness to accept a lower rate in OECD negotiations.
The UK should welcome this proposal and push for the higher 21 per cent minimum rate as a bold attempt to remedy the offshoring of profits by multinationals. The proposals are a triple-win for the UK, yielding a fairer tax system, more revenue, and a showcasing of global leadership. The G7 meeting next month has the potential to be a critical moment where the richest nations agree to replace the race-to-the-bottom on tax with a race-to-the-top on investment. The new tax system would be fairer and more equitable, removing current loopholes that give gigantic firms (which are able to shift their profits overseas) an unfair advantage over smaller firms and high street businesses.
Boris Johnson’s agenda is focussed squarely on levelling up regions across the UK, achieving net zero CO2 emissions by 2050, and grasping new scientific and technological opportunities. All of these things cost money, and the latest projections of a global minimum corporation tax at 21 per cent would raise $20.9bn (£14.7bn) of additional revenue per year in the UK whilst if the rate were set at 15 per cent the additional revenue would drop to $11.2bn (£7.9bn).1 This compares to the UK’s negotiating priority of a Digital Services Tax which is forecast to raise just £500m per year. The minimum tax would thus generate substantially more revenue that the UK could use for the benefit of its citizens, including the Johnson administration’s priorities of investing in transport infrastructure, broadband and digital connectivity, and universities and skills.
It’s important to put this move in historical context. Governments initially provided incorporation rights so that they might pursue specific missions to benefit the public. In the US, this practice dates back to the 1700s and in the UK even further back. The bargain was simple: states would offer limited liability rules in their legal systems, and in exchange corporations will build bridges, employ workers, and engage in other societally useful activities. As the corporate form became more common, and as nations instituted income taxes, a second layer to this bargain was added. In exchange for all the benefits of government - roads, social safety nets, national defence, and much more - corporations would pay tax on their profits. For decades, this dual bargain worked well. But by the 1980s, this pact had broken down. As the new economic consensus of Thatcher and Reagan permitted more capital mobility, countries could compete for that capital by lowering or even eliminating corporate taxation. Pursuing an explicit tax haven industrial policy, these countries facilitated rampant profit-shifting by multinational companies. Indeed, economists estimate that up to 40 per cent of multinational income is shifted in this manner, extracting wealth from the coffers of the countries that allowed them to exist in the first place. As long as companies are able to avoid tax through off-shoring revenues, the Treasury in the UK and finance ministries around the world lack the sovereignty to effectively decide their own rates of taxation as firms can chase the lowest rate through the race to the bottom.
For the past 40 years countries have engaged in a race to the bottom, attempting to attract firms by undercutting each other on taxation rather than by investing in the wider business environment through infrastructure, innovation, or skills. In the UK the headline rate of corporation tax fell from 30 per cent in 2008 to 19 per cent today, with workers paying a greater share of tax revenues through income tax and national insurance as a consequence. This revenue starving and profit-hoarding has increased inequalities in income and power, a process that threatens the stability of our democracies. This trend has only been accelerated by the rise of the connected, international economy, where a company can be headquartered in Silicon Valley, make sales in Swindon, but book their profits in Switzerland. Leaving these issues unaddressed risks the stability of national and international economies as the digitalisation of our economy accelerates in the 21st century.
The UK is increasingly isolated on this issue. As the Johnson administration hosts the first post-Covid meeting of the G7 in Cornwall in June, the other six G7 members have come out in support of the Biden tax proposals. That the “top 3” tax havens in the world are all British territories has led some observers to question whether the UK’s holdout to-date is indicative of an ideological opposition (these are the British Virgin Islands, Bermuda, and the Cayman Islands). The UK can dispel those doubts and show international leadership (not to mention win favourable headlines on front pages of newspapers around the world) by announcing support for a global minimum tax ahead of the summit.
These opportunities are scarce. The Trump presidency demonstrated what US intransigence on the world stage can do for global cooperation when his refusal to engage with OECD negotiations deadlocked global agreement. The Biden administration's ambitious tax plans are central to his domestic and international economic policies, but razor-thin margins in Congress mean the administration must act quickly. This is a rare window of opportunity to establish a new international economic consensus based on fairness and upon domestic investment, and the UK should seize it.
The authors are, respectively, executive director of the Institute for Public Policy Research in the UK, and president and CEO of the Roosevelt Institute in the US. Wong also serves as the US representative on the G7 economic panel on economic resilience.
1 Modelling of a 21 per cent global minimum corporation tax based upon previous OECD proposals. Garcia-Bernardo J (2021) 'A less complex and fairer tax reform: the Minimum Effective Tax Rate (METR) for Multinational Corporations', data table. https://datawrapper.dwcdn.net/2BhFm/5/ [Last updated 15 April 2021]
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