G7 plan is wrong way to fix corporate taxes

As things stand, the global tax proposals recently announced by the Group of Seven’s finance ministers and endorsed at the weekend’s G-7 summit raise more questions than answers. The group’s governments say they’ve agreed on two linked initiatives — first, to set a common minimum corporate tax rate of at least 15%; second, to apportion the profits made by some big multinationals according to where their goods and services are sold. Whether this plan ever goes forward and what exactly it would mean if it did are far from clear, but the deal looks suspect.
The proposals can be seen as a bargain struck by the US on one side and the rest of the G-7 on the other. Several European governments have argued that they deserve a greater share of the profits that America’s leading digital-services companies make in their markets. They’ve developed various new taxes to tap this pool, and the US has threatened tariffs in response. The G-7 announcement suggests that the US is willing to let other countries tax its multinationals’ profits. In return, the other governments will help the Biden administration raise the domestic corporate tax rate by limiting the freedom of other countries to set rates low enough to draw capital away from the US.
Two questions should be asked about this arrangement. First, will it do what governments intend, and raise more revenue? Second, and more important, is it good for their respective producers and consumers? The answers will depend on the fine print. Before dividing up the spoils, complex rules will be needed to specify which firms will be affected, how their profits will be measured, and how the new minimum rate will be applied. Before even getting to this, many more countries will have to sign on. Some of them, notably Ireland, have prospered thanks to very low corporate tax rates. They might give way to pressure, but they won’t be eager.
In the end, the whole plan could come to nothing. But suppose it goes ahead on the terms indicated. Has Biden struck a good bargain?
At first sight, it doesn’t look that way. Treasury Secretary Janet Yellen says the outline agreement to adjust the allocation of profits among the US and its trading partners will be “largely” revenue-neutral for the US — but this is a surprising claim. Again, everything depends on matters still unresolved, and some of these are more than mere details. (Within days of applauding the tentative new agreement, UK finance minister Rishi Sunak was calling for the finance industry to be excluded from the base-apportionment formula.) The world’s biggest and most successful multinational enterprises are disproportionately American, suggesting that the US would lose more from these tax-base changes than it would gain.
Europe’s finance ministers had seemed to be working on this assumption. A separate issue is whether the proposed new minimum would make it easier for the US to gather more corporate tax with its own higher rate — 28%, as Biden has proposed, or 25%, as some in Congress want — relative to the current 21%. It’s hard to see why it would. If the US sets its profits tax at 28% and others remain free to set theirs at 15% (only slightly higher than Ireland’s current rate), then Biden’s preferred policy will still put US-based producers at a substantial disadvantage.

—Bloomberg