The level of the global minimum tax matters
In this paper Niels Johannsen studies the global minimum tax in a model of international tax competition with heterogeneous countries. The key advantage of the formal model is that it treats not just firm behavior, but also national tax policies as endogenous to changes in the international tax system. His analysis provides guidance on the impact of different levels of the tax on the welfare of havens (where multinational firms conduct real economic activity) and non-havens (where they operate empty shell companies for the purpose of profit shifting). In particular, he finds:
- The global minimum tax lowers welfare by raising the equilibrium tax rate in havens and thus increasing the total tax liabilities of firms. The mechanical effect on firms’ tax liabilities represents a loss of private consumption for the owners, which lowers welfare in non-havens.
- It also raises welfare by narrowing the tax differential between havens and non-havens and thus deterring profit shifting. The behavioral effect on government revenue represents a gain of public consumption in non-havens, which raises welfare.
From a policy perspective, the paper thus highlights the risk of introducing a global minimum tax at a rate that is too low, in which case profit shifting continues and havens capture part of the global revenue gain created by the policy. It is unclear whether the projected 15% rate is high enough to ensure that the overall welfare effect is positive.
The Global Minimum Tax
Author: Niels Johannesen
From: University of Copenhagen
The effect on low-and-middle-income countries
Low-and-middle-income countries (LMICs) and in particular Kenya, Nigeria, Pakistan, and Sri Lanka have refused to proceed with the implementation of the global tax deal (Inclusive Framework or IF) because they have expressed concerns about its equity.
As a result Julie McCarthy argues that:
As the IF deal runs up against potentially fatal political challenges to implementation, LMICs would do well to keep their distance and refrain from taking steps to implement it themselves in the near term. This is especially true when it comes to eliminating existing or planned digital services taxes, as the U.S. and Europe have been pressuring them to do, including through the threat of potential sanctions.
The new global tax deal is bad for development
By: Julie McCarthy – Brookings
