Governments around the world have pushed to make significant changes to how corporate profits are taxed in a global economy, and the taxation of huge corporations has been in the limelight recently. Over 130 governments agreed last year to a policy framework that would shift where firms pay taxes and impose a global minimum tax of 15%.
Although the Biden administration has been supportive of these negotiations, the changes should be considered in light of recent policy changes in the United States and elsewhere, the general landscape of business taxation in the United States, and the potential challenges and risks posed by the global tax agreement.
In the midst of the global tax discussion, here are four things to bear in mind:
1. Since 2017, profit-shifting incentives have lessened.
One of the goals of the 2017 Tax Cuts and Jobs Act (TCJA) was to diminish the incentives that businesses had previously had to keep big profits offshore and out of reach of the IRS. According to recent data, the policy adjustments have been beneficial in diverting previously offshored assets back to the United States and lowering companies’ artificial IRS avoidance. Furthermore, while the TCJA reduced the tax burden on doing business within the United States, the overall tax burden on overseas income earned by U.S. corporations remained relatively constant.
2. Corporate tax rates are now in the low twenties.
The reduction in the company tax rate from 35% to 21% mirrors a broader trend of countries targeting corporate tax rates of 20% to 25%, with the downward trend having levelled off in recent years. When state-level corporate tax rates are factored in, the total tax rate on corporate revenue in the United States is 25.75 percent, which is higher than the global average of 23.5 percent.
3. Measures of business tax revenue in the United States should include both corporate and pass-through firms.
The tax system in the United States does not exactly match that of other countries when it comes to corporate income. The individual income tax applies to a substantial portion of the pass-through business sector in the United States. In fact, in the United States, more than half of business income is reported on individual tax forms. Over the last 30 years, this sector has risen in relation to C businesses, making comparisons over time and between nations more difficult. After accounting for pass-through business tax receipts, business tax income in 2021 is expected to be around 3% of GDP, which is within the historical range.
4. The corporation tax structure in the United States is still tremendously complicated.
The reforms enacted by the TCJA were not without flaws. For international corporations, many of the reforms have made the tax system more complicated. In a 2020 study of the complexity of corporation tax regulations in 69 countries, the United States was ranked 50th out of 69 countries. Canada was ranked 27th, and the United Kingdom was ranked 28th.
Unfortunately, the House of Representatives supported the Build Back Better proposal last year, which would have made US tax regulations substantially more complicated, especially for major multinational corporations. Not only would the ideas be more complicated, but they would also impose a larger tax burden on American businesses than the global minimum tax blueprint suggests. The United States’ approach to enacting the global minimum tax would be crucial, and current ideas aim for a particularly onerous method.
One path forward for the US system, as we discussed in our options for tax reforms that promote growth and opportunity, would dramatically simplify our international rules by replacing GILTI with a worldwide tax system and full credit for foreign taxes while eliminating tax preferences that would not be recognised by the global minimum tax.
Before embarking on a tough path of taxing multinational corporations, policymakers must exercise caution and identify the actual problems that need to be addressed. Adopting policies that diminish the US tax base appears counterproductive if the concern is about the US tax base. The plans may potentially increase (rather than decrease) the incentive for American businesses to avoid paying taxes in the United States.