Home US Foreign Affairs Global Minimum Tax: A Sheer Blessing or Instrument of Economic Destruction?

Global Minimum Tax: A Sheer Blessing or Instrument of Economic Destruction?

by Eli Mshomi
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The developed countries have often worried about their shrinking profit amid the rising tax havens in the world.

As corporations move from tax-intensive countries to tax havens, they make a bid to maximize the revenues, pursuing a race to the bottom

The finance ministers of the G7 countries have agreed to embed a tax system that would stop multinational companies from escaping taxes.

The United States Treasury Secretary Janet Yellen is committed to winning global support for the implementation of the global minimum tax rate of 15 percent.

As the proposal is now ready to be presented in front of the G20, a group of 20 stakeholders, the United States is hopeful of making a significant breakthrough. 

If implemented, it will bind the multinational companies to pay the decided amount of tax to their home countries.

Multinational corporations often start their operations in low-tax countries, so they would be discouraged from doing this.

It makes the bigger economies, especially the United States, worried as they fail to achieve the tax targets they could have otherwise.

If implemented, the global minimum tax would increase the suffering of the low-tax countries.

The Foreign Direct Investment (FDI) in those countries would reduce by manifold levels, and the employment opportunities would nosedive in the less developed countries. 

While on the one hand, the Biden administration is in pursuit to address the root cause of migration by incentivizing the home countries in one way or another, this step can be a countermeasure of the anti-immigration agenda.

What are the pros and cons of the global minimum tax rate, and is it a feasible plan in the long run? Let’s see.

Pros of the Global Minimum Taxation

Increasing Development in the Already Developed Countries

Global corporate heavyweights have often dodged their home countries to settle in the low-tax countries.

These low-tax countries, or as they are popularly known. tax havens, include Ireland, Singapore, Cayman Islands, and Bermuda, to name a few.

If a global minimum tax is implemented, the private businesses would have little to no incentive to continue their operations in these tax havens.

It would force them to bring back the investment to the home countries. This plan revolves around bringing back the investment to the already developed countries, which is why no country in G7 has opposed the proposed measures.

 

A Level Playing Field

The pro-global minimum tax groups evince that it would reduce the incentives given by the developing countries to the private businesses.

This way, a level playing field would be created between the developed and non-developed nations.

The advocates of these measures manifest that the developing countries can still lure the businesses with other incentives, including better tariff rates and lower customs duties.

Cons of the Global Minimum Tax

A Retreat of Globalization

The rise of the 21st century has fastened the concept of economic globalization. Multinational corporations (MNCs) and transnational corporations (TNCs) are the biggest stakeholders in this economic globalization.

Countries are more connected with each other because of these omnipresent economic activities. This interdependence is so crucial that the liberalist school of thought in international relations believes that this interdependence is the biggest reason why countries do not go to war against one another in the modern-day world.

They know that the stakes are mutual, and the destruction would be mutually assured. In the case of the global minimum tax, economic globalization would retreat, reducing the interdependencies of countries on each other.

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Seen from the bigger perspective, it could trigger many conflicts in the contemporary world.

 

Rising Inequalities

Economic inequality has become one of the biggest curses of capitalism in the world today. The richest one percent of people occupy more than double the total worth of the 6.9 billion people. 

More than half of the global population lives with wages of under $5.50 per day. In these times, implementing the global minimum taxes would force the businesses to transfer their regimes back into the developed countries.

This would certainly create a sense of distrust and unemployment in the developing and poor countries. Poverty would increase manifold with the imminent social mobility.

A Bifurcated World

In case the global minimum tax becomes a reality, new power blocks would emerge instantly in the world, with the developing countries aligning with each other.

The distrust against the western countries is already rampant in the eastern world, and this step could be perceived as an instrument to further weaken the developing world.

The political uprising could increase in the developing world with few employment opportunities, forcing the governments there to take unpopular measures.

Global Minimum Tax: Can it even Become a Reality?

Taxation is a sovereign issue, and no supernational authority is present to collect taxes to date. No country, not even the United States, can coerce any other independent country to implement the tax laws of her choice.

Despite the fact that the idea is endorsed by the G7 and is likely to be supported by G20, many developing countries have few incentives to extend their appreciation of the proposal.

China is surely going to oppose the measure because of its overdependence on exporting the surplus capital in developing countries.

The private business giants are responsible for increasing Chinese influence in the world. The rise of Chinese soft power across the globe is also indebted to the free flow of capital.

So, more countries can bandwagon China, allowing investment under the Belt and Road Initiative (BRI).

Final Thoughts

The proposal can be counterproductive to the other ongoing ambitions of the United States. The Biden administration recently announced that they would address the root causes of migration

This plan needs an economic environment that provides ample benefits to the private businesses to continue their operations in the less-developed countries.

In case the global minimum taxes are implemented, private businesses would never like to shift their operations to developing countries.

Not only this, President Boden recently announced at the G7 summit that the United States would take the rising Chinese ambitions through Build Back a Better World (B3W), an initiative that would suppose to contain Chinese investment under BRI.

The rise of the Chinese economy since the late 20th century is indebted to the private sector. The same private sector invests heavily in the BRI.

The Biden administration needs to follow suit. If they want B3W to succeed, the businesses need incentives and not taxes.

In the absence of global minimum taxation, private companies are more likely to continue their operations overseas. But this is not the case in the presence of global taxation rates. 

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