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Addressing Corporate Tax Avoidance: The Need for a Global Minimum Tax

The Tax Cuts and Jobs Act of 2017, which was initially hailed as a transformative reform for the U.S. tax code, has not lived up to its promise of spurring investment, job creation, and economic growth. Instead, it has paved the way for widespread corporate tax avoidance, turning what were once loopholes into significant liabilities. To combat this issue effectively, the introduction of a global minimum tax has become crucial.

President Joe Biden’s recent budget proposal takes a positive step towards addressing this problem by advocating for a global minimum tax that would ensure all multinational corporations pay at least a 21% tax rate on their earnings in each jurisdiction. This initiative aims to halt the competitive lowering of corporate tax rates and level the playing field for U.S. businesses.

An analysis by the Institution on Taxation and Economic Policy based on corporate 10-K filings revealed that 342 of the most profitable corporations paid an average effective tax rate of only 14.1%, well below the reduced rate of 21%. Clearly, the Tax Cuts and Jobs Act has served more as a corporate giveaway than a catalyst for domestic economic growth.

As the Biden administration’s tax policies face uncertainty with the upcoming presidential election, advocating for a global minimum tax is timely and essential for maintaining the integrity of the corporate tax framework. Such advocacy must be intensified to ensure that corporate tax reform is a focal point in the upcoming elections.

The transparency provided by corporate disclosures to the Securities and Exchange Commission is crucial for understanding the extent of corporate tax avoidance. However, to effectively address tax avoidance, high-level policy solutions must be accompanied by stringent disclosure requirements. Companies should be mandated to disclose detailed information about taxes paid in different jurisdictions and the benefits and credits they receive. This would allow tax authorities, investors, analysts, journalists, and the public to gain clear insights into corporate tax strategies and identify misuse of tax havens or other avoidance tactics.

Despite the global push for a minimum tax rate of 15% by over 140 countries under the G20 and OECD’s Pillar Two initiative, the U.S. has yet to sign on. This non-participation leaves significant tax revenue on the table, which could otherwise be invested in critical areas like infrastructure, healthcare, and education. The fears that a global minimum tax could negatively affect job creation and foreign investment do not hold up against the backdrop of its widespread international acceptance.

The U.S. must seize the opportunity to join the global minimum tax initiative, which could also simplify compliance and reduce administrative costs for multinational corporations. This move would discourage detrimental competition among firms and governments, promoting a more equitable global economic environment.

The reality of the Tax Cuts and Jobs Act is far from its initial projections. Instead of boosting revenue, it is estimated to result in a loss of $1 to $2 trillion over its first decade. Many of its cuts to personal income tax are set to expire by the end of 2025, which may lessen the urgency to adopt a global minimum tax but should not diminish its importance.

Implementing a global minimum tax not only addresses the loopholes that facilitate tax avoidance but also restores public trust and strengthens the nation’s global competitiveness and future investment capacity. It is a necessary step toward a fairer and more equitable corporate tax system.

 

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