The author is a professor of economics and finance at Columbia University and former chairman of the American Council of Economic Advisors

From the very beginning of the Biden administration, US Secretary of the Treasury Janet Yellen (Janet Yellen) has been advocating the implementation of the global minimum tax on enterprises. Although the United States has abandoned the 21% tax rate requirement (which is related to the goal of increasing the current US corporate tax from 21% to between 25% and 28%), it does have a lock-in rate of at least 15% with the G7 Treasury Secretary. Secretary of State Yellen praised the move: “The global minimum tax will end the race to the bottom of corporate tax and ensure fairness for the middle class and working people in the United States and around the world.”

It is difficult to say that corporate income should not be paid for its “fair share.” But the global minimum tax raises political and economic problems.

Let me talk about politics first. Obtaining approval in the United States can be difficult. The OECD estimates that the minimum tax can raise as much as US$50 billion to US$80 billion each year, most of which come from successful American companies. The revenue of the US Treasury Department will be part of this amount, but this figure is small compared to the substantial expansion expenditure proposed by the Biden administration. If it fails to obtain the approval of the US legislature, will other governments use their own political costs to conclude a deal that may be short-lived? Even if the transaction is successful, will it hand over the competition to China? As a non-party to the G7 or OECD proposal, can’t both tax rates and subsidies be used to attract more investment in China?

But on the economic front, the global minimum tax raises more sensitive issues in two areas. The first is the design of the tax base. The second one addresses the basic question of what policymakers are trying to solve, and whether the new minimum tax is the best approach.

15% speed Not particularly useful if there is no agreement on the content of the tax according to Yes. Especially for the United States, which has many lucrative technology companies, people should be concerned that countries will use special taxes and subsidies that are effective for certain industries. Since the 2017 Tax Cuts and Jobs Act enshrined the GILTI (Global Intangible Low Tax Revenue) clause into the law, the United States has established a version of the minimum tax on foreign income. The Biden administration hopes to use the new global minimum tax to increase the GILTI tax rate and expand the tax base by eliminating the GILTI deduction for investment in overseas factories and equipment.

In order for the 15% minimum tax rate to be meaningful, countries need a unified tax base. Presumably, the goal of the new minimum tax is to limit the interests of companies that transfer profits to low-tax jurisdictions, rather than to distort where these companies invest. The combination of the global minimum tax and the broad base advocated by the Biden administration may reduce cross-border investment and reduce the profitability of large multinational companies.

A deeper economic issue is who bears the tax burden. I pointed out above that the projected revenue growth is small compared to the level of G7 government spending. According to the contemporary economic view of who bears the tax burden, it is not companies that pay more, but ordinary capital owners and workers.

There is a better way to achieve what Yellen and her colleagues in the Treasury Secretary are working hard to achieve. First, countries can allow investment to be fully expensed. This method will shift the tax system from corporate income tax to cash flow tax, and has long been favored by economists. In this revision, the minimum tax will not distort new investment decisions. It will also push the tax burden onto economic rents—profits exceeding the normal rate of return on capital—to better meet the G7’s obvious goal of getting more revenue from the most profitable large companies. And such a system will be easier to manage, because multinational companies do not need to set up different ways to track deductible investment costs in different countries over time.

In the debate that led to changes to the 2017 U.S. tax law, Congress Destination-based cash flow tax. Just like value-added tax, this will tax the company’s profits based on the cash flow in a particular country. This reform failed due to the political will to adjust borders, limiting tax bias against investment and promoting tax equity.

Back to the numbers: As suggested by the Biden administration, countries with higher levels of public expenditure relative to GDP mainly finance them through value-added tax rather than traditional corporate income tax. A better global tax system is possible, but it starts with the “not GILTI” decision.