»We are happy«

Germany welcomes U.S. call for global minimum corporate tax rate

Is this the beginning of a newly discovered friendship? Germany recently welcomed a proposal by the United States that calls for corporations around the world to pay at least a 15% tax on their earnings. The U.S. Treasury Department released its plans, saying that international negotiations should be ambitious — meaning that ultimately the figure could be higher than 15%. As I have laid out before in this newsletter, the corporate tax rate in the U.S. is currently 21%, but President Joe Biden has plans to raise it to 28% and wants higher rates in the rest of the world. “This is really a big progress,” German Finance Minister Olaf Scholz rejoiced regarding the U.S. announcement. “We are happy that it looks very much like we will have a solution in the summer this year,” Scholz added. “This is the best chance for having a global tax reform which will fight against the race to the bottom.”

All’s good in paradise?

Not really as the issue can be contentious even within the European Union, where various member states charge different corporate tax rates and can attract big-name firms by doing so. Ireland’s tax rate, for example, is 12.5%, while France’s can be as high as 31%. Irish Finance Minister Paschal Donohoe recently said smaller nations should be allowed to have lower tax rates given that they don’t have the same capacity for scale as the larger economies do. U.S. Treasury Secretary Janet Yellen answers back saying that establishing a global minimum rate would discourage companies from relocating domiciles to other countries to cut their tax burdens even though most of their operations are in the U.S.

If you asked me about my opinion on the pro & cons of corporate tax rate cuts or increases, I would quote the US Judge, Oliver Wendell Holmes Jr.: “Taxes are what we pay for civilized society”. While one can argue about the optimal size of the state, it is clear that all governments need stable sources of revenue to provide the social goods expected by their people.

Minimum or Fair share?

When it comes to taxing businesses, there are two poles: some argue that, as corporation tax is generally considered to be the most economic distortive tax, it should be kept to a minimum, or even eliminated. Others see – especially international – companies as not paying their “fair share” and as an easy font to be tapped.

As is often the case, the truth probably lies in the middle. There are debates about who actually bears the cost of corporation tax – the shareholders, employees or customers. Nevertheless, it is clear that businesses benefit from the infrastructure of a country and there are equitable, practical and political reasons why they should pay tax. However, while tax is not just a cost to be reduced to the minimum, it is a burden which reduces investment and economic output. Furthermore, businesses pay far more than just corporate or business tax. Therefore, it is necessary for governments to think about both designing a tax system that supports investment and about the total tax burden borne by business.

The Perfect Tax System

There is no one blueprint for a perfect tax system. Each one needs to take account of the particular circumstances of the country it is designed for. And it should be developed through dialogue with all the stakeholders. There needs to be a recognition that business requires a stable, thriving society to which it should contribute; and on the other, that business pays far more than corporation tax, and the system needs to be crafted to incentivize investment and growth. Something that German Finance Minister Olaf Scholz should consider when advocating for higher tax rate rates across the world.