An Idea on Taxation That Is Worth A Try

Context: An analysis of the proposal for a minimum global corporate income tax.

Minimum Global Corporate Income Tax

• US Treasury Secretary Janet Yellen urged the G20 countries to adopt a minimum global corporate income tax i.e. setting a minimum rate for corporations all over the world to pay regardless of which jurisdiction they are registered.

The necessity for a minimum global corporate income tax

• Pandemic impact forcing Governments to look for ideas to raise revenues:
  • Governments need resources: To help people through the transfer of incomes, provision of more public services, and also prevent business failures.
  • Resources adversely impacted by the economic downturn: Consequently, fiscal deficits reached record high levels.
  • Triggering of massive inequality: Stock markets are booming in anticipation of demand being pumped in by these high deficits, resulting in widening inequality between those who gained in stock markets and those who lost employment and incomes.
• Massive deficits in the budget: In addition to pre-existing deficits in the budget, an additional 15% of GDP is being added by the US alone in both 2020 and 2021.
  • Implication: An urgent need for additional tax collections to reduce large deficits.
• Support for the idea: Rich Americans like Jeff Bezos, Warren Buffet, and many more supported the idea.

Limitations with alternative policy options

• Constraints in a unilateral tax hike: could trigger massive capital outflows
• Continuing Base Erosion and Profit Shifting (BEPS): Companies shift their profits to low tax jurisdictions, especially, tax havens.
• Limitations of rising indirect taxes and the resultant regressive tax structure: Rising indirect taxes impact less well-off proportionately more and are inflationary, resulting in fall in demand in economy and thus, slowing down growth.

Concerns associated with the idea

• Hinder poor countries’ ability to attract investment: Cited by World Bank.
  • Current trend: Any country facing economic adversity can cut its tax rates to attract capital and force others to follow suit.
  • Indian case: Cut its tax rates since the 1990s and most recently in 2019, corporation tax rate was cut drastically to match those prevailing in Southeast Asia.
• Against trend in tax policies since the collapse of Soviet Bloc: When Soviet Bloc collapsed in 1990, East European countries began the trend of lowering tax rates to attract investment.
  • Implications – Race to the bottom: Nations became short of resources and cut back expenditures on public services and encouraged privatisation.
  • Developing countries: Followed the suit, though the private sector left out poorer sections resulting in rising inequality.
• Stiff resistance: From businesses and conservative legislators.

Conclusion: The impact of the policy will be far-reaching impacting inequalities, provision of public services, and reduction of flight of capital from developing countries including India and that will impact poverty, thus it is worth giving a try despite the challenges and concerns.