Taxation Equals Less Liberty
The 15% Global Minimum Tax is America Last, Economic Activity, Freeze Spending, Samuel Adams
In this issue:
Liberty Perspective: The 15% Global Minimum Tax is America Last
Wealth Digest: Economic Activity
The Word: Freeze Spending
Historical Hero: Samuel Adams
The 15% Global Minimum Tax is America Last
A key initiative of the Biden Regime is advancing along. 136 countries have just agreed to an outline regarding a global minimum tax of 15% and other tax rules. It would still need approval by Congress to be enacted unless the Regime can skirt normal treaty procedures. There are four countries that have not yet agreed to the terms, but they are inconsequential and will not stop the deal.
The rules are complex, but there are two major provisions. First: there is a 15% global minimum tax rate for large multinational corporations. If a subsidiary is taxed lower than 15%, then the country where the corporation is domiciled can tax that revenue up to the 15% level. So if a subsidiary is taxed at 5% on some island, then the U.S. can tax that revenue an additional 10% (15%-5%).
Second: big tech companies will be partly taxed where they have sales not just where they are headquartered or have operations. This second provision is what the rest of the world is excited about since it means taxing companies like Alphabet and Facebook. Tax revenue to the U.S. will decrease because the Treasury will not collect the same amount of taxes from big tech firms.
What Treasury Secretary Janet Yellen and President Biden are excited about is the global minimum tax of 15%. Paying taxes to the country where a company has operations is known as a territorial tax system, which is how most nations currently tax corporations and subsidiaries now. The big takeaway isn’t where profits are taxed, but the minimum tax rate of 15% that can be topped up by the country where a firm’s headquarters are located.
The benefit, advocates say, is that it will discourage large corporations from using tax havens since they’ll still have to pay 15% no matter what. Yellen has been everywhere yelling that it will eliminate a “race to the bottom” where some countries were competing with one another to attract these kinds of subsidiaries.
The subsidiaries in question are setup in tax haven countries by multinational corporations. They do this because they have significant income from intangible assets such as from patents, trademarks and royalties. The purpose is to avoid paying corporate taxes on these profits to their home country. There are no operations in the tax haven country; it’s just an office address.
The Trump Tax Reform
The problems that the Biden Regime says they’re solving have mostly already been solved. Before the 2017 Tax Cuts and Jobs Act, companies would offshore their headquarters to avoid paying the 35% U.S. corporate tax in a scheme called tax inversion.
Additionally with subsidiaries, foreign profits would remain outside the U.S. to avoid paying the U.S. worldwide tax on profits. The U.S. would tax profits for foreign operations at the 35% level, but with a credit for any tax paid to the foreign country.
With the 2017 tax reform, the U.S. partly transitioned away from a worldwide tax system to a territorial system for countries that had similar taxing structures as the United States. We also lowered the corporate rate from 35% to 21%.
The part that remained worldwide was for other countries with low corporate tax rates that attract subsidiaries with profits from intangible assets. There is a minimum tax of 10.5% the U.S. charges homebased corporations on such foreign profits, allowing for a tax credit on what the company paid in corporate taxes to the foreign country.
The result of the Act was that future foreign profits from comparable advanced countries could be repatriated without paying a worldwide tax. Amounts that were previously deferred were repatriated with a flat 15% tax. The Act also reduced the incentive for companies to set up subsidiaries in tax haven countries since there was a minimum tax of 10.5%. And, by lowering the rate from 35% to 21%, companies were less incentivized to setup tax inversions.
The Liberty Perspective is that the Biden Regime didn’t push this agreement because they wanted to be good global citizens by sharing big tech tax dollars or for solving long standing problems. Many in the media are portraying it as return to multilateralism and a reversal of Trump’s America First policies. And somehow that’s a good thing?
Every other country in the world has a “their country first” policy. It’s why many agreed to this deal because they’ll receive more revenue from technology giants. It’s why Ireland wouldn’t agree to the terms before they got what they wanted. Only the U.S. has political leaders and citizens who demand that we don’t negotiate for what’s best for our country. Instead, we get America last policies.
It’s just a Pretext
Now, the real reason that the Biden Regime wants a minimum global tax is so that they can increase the corporate tax rate in the U.S. from 21% to 28%, or even higher one day back to 35%.
The Regime was fighting for the global minimum tax to be 21%, but countries like Ireland wouldn’t agree. The agreement also had language stating a minimum tax of “at least…” meaning that it could be raised easily. The new agreement that Ireland held out for was the global minimum tax to be 15% and they removed the at least from the language so it can’t be raised in the future without updating the agreement.
With these tax rules, the floor effectively goes from 10.5% to 15% as far as the United States in concerned. This will supposedly justify increasing the corporate tax rate by Democrats.
America Last Policy
There would be a new bottom of 15%. But by increasing the U.S. corporate rate to 28% or higher, it will still incentivize tax havens (for subsidiaries) and inversions (for moving headquarters). Also, the tax revenues Yellen projects won’t materialize.
More Tax Havens
Let’s look at an example. Zcorp opens a subsidiary for their royalty income in the Cayman Islands, which doesn’t have a corporate tax. They do so because they don’t want to pay the 21% in U.S. taxes. Instead, they pay the minimum to the U.S. of 10.5%.
If Yellen and Biden get their way, Zcorp will still remain in the Cayman Islands to avoid paying the 28% in U.S. taxes. Instead, they’ll pay the minimum tax of 15%.
Under the new system, businesses will be even more incentivized to move operations out of the U.S. because saving 13% (28%-15% minimum rate) under the proposed Biden plan is more attractive than saving 10.5% (21%-10.5%) under the current system.
Less Tax Revenue
In addition, it only appears that Zcorp will pay more in taxes to the U.S. because 15% is more than 10.5%, but that won’t be the case. Currently, it’s the U.S. that has a minimum tax, not the rest of the world. Consequently, tax havens still have low or no taxes to also attract other foreign subsidiaries.
If there’s an agreement, however, between all nations to have a global minimum tax, then these tax havens will begin to raise their corporate taxes up to the 15% level. The reason is because the subsidiaries that reside in these countries will be paying the minimum tax anyway to their home countries; they might as well pay the 15% to the tax haven country. Therefore, as a result of multilateralism cooperation, the U.S. won’t receive anything from these subsidiaries.
More Tax Inversions
As for tax inversions: let’s say Acorp is contemplating moving its headquarters out of the U.S. to the Cayman Islands to avoid paying the current minimum tax of 10.5% on their foreign profits. They’ll still, of course, have to pay the 21% for their operations in the United States.
Under the Biden plan, though, they will be even more motivated to setup a tax inversion to avoid paying the 15% in foreign profits because it’s nearly 50% more in taxes than if they did it within the current system.
This new plan will have the opposite effect of what they’re claiming. It will result in more tax inversions and the using of subsidiaries in tax haven countries. As companies escape U.S. taxation, we’ll lose American headquartered businesses, jobs and a ton of tax revenue.
If Republicans in Congress green light this agreement, then they are also green lighting raising the corporate rate. I can also imagine that once a new agreement is operational and countries like Ireland have adjusted, a future increase in the minimum rate would be likely. This, of course, would facilitate even higher corporate rates around the world.
A better course, that’s America first, is to keep the corporate tax rate and the minimum tax on foreign profits exactly where they’re at. If you want to be a good global citizen, then proceed with the provision where tech companies have to pay some taxes where their sales occur, but only if countries such as France agree to no longer tax these companies.
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Wealth Digest: Economic Activity
There’s a superior way to see higher tax revenues than by raising the corporate tax or the personal income tax. The better way is with economic activity.
Raising taxes on the supply side, for both business and labor, will mean less economic activity. When individuals are taxed more, they obviously spend and invest less.
With higher rates, corporations cut spending too, especially on wages. They do this to maintain a certain level of earnings for their shareholders, which are calculated after paying the corporate tax. Most companies would prefer to increase revenues, but when the supply side is being constrained by the government, downsizing is the usual response.
So taxation results in less economic activity and the tax revenue to the government isn’t what it would be if economic activity didn’t decline. Government does bring in more revenue with the higher rates, but it also loses revenue at the same time due to lower economic output.
The government primarily collects its revenue by taxing personal income and business profits. The higher the income and profits, the more revenue they’ll collect.
Therefore, good government policy is to encourage economic activity by incentivizing the supply side, which includes both business and labor. It’s not to encourage demand or more spending because if supply is free to meet demand in a favorable economic climate, then transactions will naturally occur.
Our policies should be to give as much freedom for businesses and individuals to earn as much income as possible by meeting market demand. This means less taxation and regulations to create the best economic climate. A freedom based economy has robust job growth, higher wages, upward mobility and more opportunities for everyone to enter the marketplace to meet demand.
When companies and individuals are earning more money, they then have the power to demand more. Demanding more means creating more income for other parties. A growing economy from economic activity will bring in the tax dollars our political leaders desperately crave.
The Word: Freeze Spending
Here’s a revolutionary idea to balance the budget, freeze spending until revenues catch up. Any inflationary increases to entitlement programs should be offset by cutting elsewhere. Once we have a balanced budget, we can then start paying off the debt.
A politician who actually cares about this country should be talking about fiscal restraint and how we can get there.
Since 1984, there’s been a beer bearing the name of Samuel Adams. While Adams did inherit his father’s business of being a supplier of malted barley for brewers, he didn’t become famous for his crafted brew.
There’s little evidence of an actual lager made and sold by Samuel Adams except for an ad published in a Boston newspaper that said, “Strong beer, or malt for those who incline to brew it themselves; to be sold by Samuel Adams, at a very reasonable rate (emphasis mine).”
It wouldn’t be long before the business he inherited went bankrupt. Perhaps his lager just didn’t catch on, but the most likely reason was that Adams was grown from the American soil for a greater purpose than that of a beer merchant.
Adams was a revolutionary thinker, writer and political leader. He received his undergraduate degree and Master of Arts (1743) from Harvard College. He was influenced greatly by Enlightenment philosophers, especially the writings of John Locke. Notably that every human being has natural rights that can’t be infringed upon and that governments should only exist by the consent of the people.
His master’s thesis was about the legal resistance against British rule if the Commonwealth couldn’t be preserved. About two decades in the future, Samuel would come to recognize that the Commonwealth was indeed in peril.
Adams Makes Himself Known
In 1765, the British passed the Stamp Act, which was a direct tax taking wealth away from the Colonists. About that same time, Adams was elected to the Massachusetts House. He spoke and wrote openly against the Stamp Act which he believed to be tyrannical. Also at that time, he joined an underground group called the Loyal Nine which were formed to resist British taxation without representation.
Thanks to Adams, the Loyal Nine became known as the Sons of Liberty and chapters spread throughout the colonies. It was these groups that organized protests against the Stamp Act and they intimidated those who would be the tax collectors so that all resigned. The first Congress of the Stamp Act was created and the colonies issued the Declaration of Rights, disputing that Parliament had the right to issue taxes without representation. As a result of all the protests, the Stamp Act was repealed by Britain in 1766.
In 1768, with the backing of the Massachusetts House of Representatives, Samuel Adams issued a statement against taxing the colonies without having representation in Britain’s parliament. He also called on the all the colonies to resist them.
It was treachery to the British governor over Massachusetts and he dissolved the state's legislature. Soon after, British troops arrived in Boston. Because of the Quartering Act of 1765, Bostonians were obliged to provide food, quarters and transportation to the soldiers.
Samuel would continue writing against British rule and he encouraged the boycotting of British goods. After the passage of the Tea Act in 1773, which allowed Britain’s East India Company to sell its tea below the price of other competitors, Adams organized groups to resist their shipments. His friend, John Hancock was doing his part by smuggling imported tea to avoid taxation.
Members of the Sons of Liberty, possibly planned by Adams, escalated the protest by boarding British ships to dump the imported tea into Boston harbor. This of course has become known as the Boston Tea Party.
In 1775, Britain decided enough was enough and sought Samuel Adams and John Hancock’s arrest in Lexington. They were warned, however, by Paul Revere that the British were coming. See Historical Hero in Liberty Word.
He would become a signer of the Declaration of Independence and a member of the Continental Congress. He helped draft our first Constitution, the Articles of Confederation.
John Hancock became governor of Massachusetts with Adams as Lieutenant Governor. When Hancock died in office, Samuel Adams became governor in his place and served from 1793 to 1797.
Image: Sons of Liberty, Public domain, via Wikimedia Commons