“Treasury Secretary Janet Yellen argued for a global minimum corporate tax rate Monday, seeking international cooperation that is crucial to funding the administration’s $2.3 trillion infrastructure proposal,” WSJ writes.
Reminder: President Biden wants to raise the corporate tax from 21% to 28%, pushing the U.S. “from the middle of the pack among major economies to near the top.” It would also place a 21% minimum tax on U.S. firms’ foreign income, remove export incentives and raise taxes on some of the overseas companies doing business in the U.S.
Why It Matters: If this comes to pass, a global minimum tax would prevent companies based outside of the U.S. from having a significant advantage. Enacting these reforms remains a high priority for Biden and Co.
- If Biden’s administration was only able to implement the domestic side of his plan, the U.S. would face a significant disadvantage and foreign businesses could be way more profitable than U.S. ones.
Democrats have struggled to gain any ground on global tax negotiations. In 2017, the Republican Congress enacted a major tax overhaul lowering the U.S. corporate rate for multinationals from 35% to 21%. It also created a minimum tax on U.S.-based firms’ foreign income of 10.5%.
- “The big difference now is that the Democrats’ domestic economic agenda depends partly on other countries following along with their own tax policies. Although many countries have endorsed minimum taxes, others may not accept one unless they can also stake a bigger claim to tax the profits of U.S. tech companies.”
Looking Ahead: Biden is all about generating revenue at this point. But different countries have different economic needs and incentives, making it difficult to reach a universal agreement. For now, the slowing efforts to cut rates globally have stabilized in the mid-20s.
Despite there being some really great ideas in the infrastructure bill, Biden’s corporate tax raises should make investors nervous, as its effects are incredibly dependent on how wisely the money is spent and if the money can be used to incentivize long-term GDP (and earnings) growth.
I believe that equalizing our tax rates between domestic and foreign businesses makes sense, because conceptually we shouldn’t be giving foreign companies an advantage over our U.S.-based ones.
But I’m not quite sure what the net effects are of removing export incentives and increasing taxes on U.S. firms’ foreign income. One could argue that the countries of the world compete against each other in global trade, and in a vacuum, these moves would increase the U.S. trade deficit.
Even though it’s not inherently good or bad to run a trade deficit or surplus, I tend to think that it’s wise not to push our already $700 billion dollar deficit to an extreme.
I’m not equipped to fully understand if these moves will be detrimental to our economy, but I can tell you one thing – they’re definitely contemplating these moves to raise money for domestic spending.