Avoidant Behavior

In 2018, the U.S. social-media giant Facebook reported profits of slightly more than $22 billion—but its corporate offices in Ireland claimed $15 billion of those profits, because Ireland’s corporate tax rate is far lower than the United States’. A new proposal by the Biden administration could put an end to such accounting maneuvers, by establishing a global minimum corporate tax rate of 15 percent. On July 1, 130 countries representing more than 90 percent of the world’s GDP agreed to the plan, and finance ministers of the G20 are meeting this weekend to draw up the rules for it, which would come into effect in 2023. Still, 15 percent is substantially lower than the current U.S. corporate tax rate of 21 percent, which was slashed from 35 percent by the Trump tax cuts in 2017. So would a 15-percent global minimum corporate income tax make any difference?

According to Daron Acemoglu, a professor of economics at MIT and the co-author of the 2012 book Why Nations Fail, it would be transformative. By cutting down on the use of tax havens abroad, corporations would contribute notably more tax revenue for the U.S. federal budget. The deal would also significantly reduce the bargaining power of capital, Acemoglu says, so the government could more effectively regulate corporations without them threatening to move overseas. As Acemoglu sees it, the plan is likely to save jobs by removing incentives for automation and offshoring. Despite the positive signs of international cooperation, he notes, the rate of 15 percent still lags far behind the tax rate paid by workers, which typically ranges from 25 to 30 percent.

Michael Bluhm: How significant is the proposed global minimum corporate income tax?

Daron Acemoglu: It’s transformative.

Two trends have been very pernicious for advanced economies. One, large corporations have been evading taxes like mad. In the 1950s, corporate income taxes made up around 40 percent of tax revenues. Today, they make up less than 5 percent, despite the fact that capital income has skyrocketed. Corporations are just not paying taxes. Not all of that is evasion—but a lot of it is.