The technical rules that were once solely the province of tax wonks in D.C. and Paris are being brought out into the public sphere.
Simplifying international tax rules will not solve all the challenges that stand in the way of healthy cross-border investment, but eliminating unnecessary provisions would be a positive pivot relative to the trajectory of recent years. It’s high time that policymakers stopped pursuing ever more complex rules and started the hard work of simplification.
The agreement represents a major change for tax competition, and many countries will be rethinking their tax policies for multinationals in light of it. However, with both the U.S. and EU hitting roadblocks in their respective legislative processes, it is unclear when or even if the agreement will be implemented. If implementation fails, a return to a world of distortive European digital services taxes and retaliatory American tariffs could be on the horizon.
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French President Macron is coming to Washington, D.C., this week to ask President Biden the question on the minds of European leaders: “Why did you do this to us?”
the Inflation Reduction Act gives us a glimpse into a future where the U.S. and EU opt for protectionist tax and trade policies rather than implementing principled tax policies and reducing trade barriers between allies.
The rules of tax competition are changing with the recent agreement on a global minimum tax and other changes to tax rules around the world, but that does not mean the contest is over.
President Biden proposed a 7-point hike in the corporate tax rate to 28 percent, a new minimum book tax on corporate profits, and higher taxes on international activity. We estimated these proposals would reduce the size of the economy (GDP) by 1.6 percent over the long run and eliminate 542,000 jobs.
Over the course of the last year, it has become clear that Democratic lawmakers want to change U.S. tax rules for large companies. However, as proposals have been debated in recent months, there are have been clear divides between U.S. proposals and the global minimum tax rules.
Some 40 years ago, the U.S. dealt with high inflation and slow economic growth. Then as now, the solution is a long-term focus on stronger economic growth and sustainable federal budgets.
While the global minimum tax gets much attention in the media, there is another significant piece to the deal.
As the Czech EU presidency considers a plan to manage various tax-related files, it would be wise to consider principled tax policy that broadens the tax base and reduces the tax wedge on strategic investment.