Rationale for Imposing Global Minimum Tax Rate and Its Economic Justification

Economics Theory and Policy
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Question One
International taxation has undergone significant transformations and is agreed upon by most states to require serious reforms, including the OECD’s and G20’s decisions. One of the fundamental premises of this restructuring is introducing a universally applicable minimum tax rate that seeks to counteract tax competition by nations (Effiong et al., 2020). This essay scrutinizes the rationale for imposing a global minimum tax rate and its economic justification. The paper will use a mathematical and game-theoretic model and illustration to accurately explain and analyse the essential point.
Economic Rationale
Addressing Tax Competition: Tax competition is about lowering corporate tax rates by jurisdictions to entice multinational firms, but it may lead to a downward spiral of tax rates. This is because, through its generation of some gains, such as encouraging growth, governments usually result in lower taxes. The use of a universal minimum corporate tax is one instrument to address the problem of competition among nations related to the corporate income tax.
Revenue Protection: The reason why a global minimum tax rate is an economic necessity lies in the protection of government revenues. When countries substantially lower their corporation tax to attract companies, it weakens their power to cover the costs of public services and infrastructures (O’Hare et al., 2022). Governments' imposition of a minimum tax will ensure a steady flow of tax revenues, especially in the wake of a pandemic that has seen many governments incurring huge expenses.
Fairness and Equity: Justice and fairness justify the worldwide minimum tax rate. In some instances, tax competitiveness could result in a situation where multinational companies, which sometimes have the ability to use elaborate tax avoidance methods, pay little to no taxes. Such phenomena place a disproportionate burden on internal companies and single taxation. Such an approach provides a basis for enacting the minimum rate, thus encouraging justice in tax.
Mathematical Model
The subject can be explained in more detail using a simple mathematical model. Let us say that two countries, country A and country B, compete for the attention of a multinational corporation bound to yield a sure profit. At this point, both of the countries have their respective corporation tax rate, namely (t_A and t_B)
"Profit for MNC in Country A: P * (1 - t_A)"
"Profit for MNC in Country B: P * (1 - t_B)"
MNCs can pay tax in countries with less burdensome taxation, thus triggering a “race to the bottom,” leading to lower revenue collection for both countries if there is no globally standardised minimum tax rate. However, when introducing GMTR (t_min) to MNCs, MNCs will select an optimal country to work on, which is not only t_min but also on the general conditions. Both countries may retain high tax revenues and encourage investment by introducing a global minimum tax rate that ensures fair taxation.
Critical Assessment
Although implementing a global minimum tax rate has some economic advantages, it is not without challenges. However, critics argue that the performance of such a policy can discourage beneficial tax competition that could boost innovation and efficiency in various tax systems. Moreover, tax law enforcement may be difficult, especially involving different tax laws and jurisdictions. In addition, a large-scale world minimum tax is crucial for its effectiveness. On the one hand, if the tax rates are set too low, the tax authority may fail to address tax avoidance satisfactorily. However, high tax rates can act as a disincentive for foreign investments. To achieve an acceptable equilibrium is vital.
Graphs Showing Comparative Tax Revenue with and without Global Minimum Tax
The above graphs show taxes rate on axis x and tax revenue on axis y. The drop in the blue curve representing tax income shows the failure of a global minimum tax due to tax competition. This red curve depicts tax revenue with an international minimum tax that provides constancy and augmented revenue to two countries.
Underlying Assumptions
Assumption of Tax Competition Harm
A global minimum tax rate is premised on the understanding that the practice of tax competitiveness where every nation continuously reduces the tax rates to lure the MNCs has harmful effects. The assumption states that competitive behaviour weakens the tax basis and results in an event termed a “race to the bottom” that diminishes tax revenues for governmental agencies (Risse & Meyer, 2019). However, we must critically examine whether the alleged tax competition consistently harms the world's economic landscape.
The tax competition fosters economic growth, stimulates government efficiency and leads to better tax policies. While it might have particular undesirable effects, upholding some balance remains crucial and not just throwing out its positive aspects.
Assumption of Effective Implementation
Another assumption includes the efficiency of imposing a global minimum tax rate among jurisdictions with diverse tax laws and compliance systems. This proposition is as valid as it depends on how countries cooperate, demonstrate trust, and have the power to beat tax evasion. However, history has shown that the strict implementation of international agreements is not always easy.
The effectiveness of the worldwide minimum tax depends on the willingness of countries to work together, share values and develop techniques for overcoming tax evasion and tax avoidance. There is a need to scrutinise the assumption that every country will observe the rules to the letter.
Assumption of Fairness and Equity
One basic thesis claims that imposing a minimum corporate income tax worldwide will entail the notion of justice in international taxation. Multinational firms are expected to take their fair share of taxes, especially those with the resources to avoid tax. It may also be vital to review whether the proposed reforms will achieve these goals since this assumption rests on principles of justice. Critics argue that whether a worldwide minimum tax rate promotes equity depends on how it is developed and how much it is set. In case the rate is set too low or there are loopholes and exemptions. If this is the case, then the capacity of the tax system to effectively reduce tax evasion and address imbalances could be impaired.
Top Gaining Countries
The distribution of expected profit from the world minimum tax rate is skewed, with some nations expecting more significant gains than others—a critical analysis of the countries likely to have the most considerable increase as projected herein below.
The higher tax rates in the developed economies are anticipated to benefit corporations. These entities have mostly fallen victim to profit-shifting and tax-avoidance activities perpetrated by multinational firms. The global minimum tax rate ensures that taxes on profits made within a particular economy are collected to increase the respective country’s tax revenue.
Several tangible benefits are expected in countries with a sizable consumer market. Adapting a universal minimum tax rate will be a disincentive to profit shifting, ensuring that these countries get a fair share of the global investment for their economies.
Nations having intellectual s...