Daily Editorial Analysis for 27th April 2021

  1. Home
  2. »
  3. Editorial Analysis April 2021
  4. »
  5. Daily Editorial Analysis for 27th April 2021

An idea on taxation that is worth a try

Why in News

  • United States Secretary of the Treasury Janet L. Yellen’s proposal for global coordination of corporate taxation has huge implications and proposed a global minimum tax rate.
  • If the major world economies agree and the U.S. Congress approves the increased tax rates, it would constitute a reversal of the trend in tax policies since the collapse of the Soviet Bloc 30 years back.
  • Presently, governments need resources to help people through transfer of incomes, provision of more public services and also prevent business failures.
  • But their resources have been adversely impacted by the economic downturn. Consequently, fiscal deficits have reached record high levels.
  • The result is a massive increase in inequality between those who have gained in the stock markets and those who have lost employment and incomes.

Massive deficits in the budget

  • The US Government is proposing a massive $3 trillion package to boost the economy.
  • This will be in addition to the $1.9 trillion package of relief already approved soon after the Biden administration took office.
  • This package came after former President Donald Trump signed on the $900 billion stimulus package in end December 2020 and more than $2 trillion in mid-2020.
  • Thus, in addition to the pre-existing deficits in the budget an additional 15% of GDP is being added in both 2020 and 2021. These are unprecedented levels.
  • However, some rich Americans like Jeff Bezos have supported the idea of taxing the rich
  • Such proposals have been around since 2011 when many of the rich in the U.S. and Europe had supported higher taxation on the rich.
  • Warren Buffet had floated this proposal to strengthen capitalist economies after the global financial crisis of 2007-09.
  • But, instead of raising the tax rate on corporations, the Trump administration cut the highest marginal tax rate from 35% to 21% with effect from January 1, 2018.
  • When the Soviet Bloc collapsed in 1990, nations in east Europe were badly hit and needed capital infusion to overcome their economic woes.
  • To attract global capital, they cut their tax rates This resulted in a ‘race to the bottom’.
  • Nations in Europe were forced to cut their tax rates one after the other to not only attract capital but also to prevent capital from leaving their shores. This had global implications.
  • Nations became short of resources and cut back expenditures on public services and encouraged privatization.
  • Governments lacked resources for education, health and civic amenities.
  • The developing countries followed suit even though private markets do not cater to the poor. Thus, disparities increased within nations.

Base Erosion Profit Shifting (BEPS) and loss of revenue

  • Namely, companies shifted their profits to low tax jurisdictions, especially, the tax havens.
  • For instance, many of the most profitable companies like Google and Facebook are accused of shifting their profits to Ireland and other tax havens and paying little tax.
  • EU has levied fines on Google and Apple for such practices.
  • Former U.S. President Barack Obama in 2009 had said that the U.S. was losing $100 billion in taxes due to such practices.
  • Since all the OECD countries have suffered due to cuts in tax rates and BEPS, initiatives have been taken to check these practices.
  • Any country facing economic adversity can cut its tax rates to attract capital and force others to follow suit.
  • India has also cut its tax rates since the 1990s. Most recently in 2019 the corporation tax rate was cut drastically to match those prevailing in Southeast Asia.
  • Such cuts have implications for both inequality as well as for funding the schemes for the poor and the quality of public services.

The regressive tax structures

  • Another implication of the reductions in direct tax rates has been that governments have increasingly depended on the regressive indirect taxes for revenue generation.
  • Value-Added Tax and Goods and Services Tax have been increasingly used to get more revenues.
  • This impacts the less well-off proportionately more and is inflationar
  • Direct taxes tend to lower the post-tax income inequality.
  • Global financial capital which is highly mobile has effectively used tax havens and shell companies to shift profits and capital across the globe.


  • The U.S. is crucial to this coordination — without its cooperation and agreeing, other countries cannot raise the rates.
  • Now that the U.S. is taking the lead, perhaps this will happen even though it will not be easily given the clout of global capital in the corridors of power in all countries.
  • There will also have to be cooperation among countries to tackle the lure of the tax havens by enacting suitable global policies.
  • The impact of all this will be far-reaching impacting inequalities, provision of public services and reduction of flight of capital from developing countries such as India and that will impact poverty.
  • So, a global minimum tax rate is worth a try in spite of the objection raised by the World Bank President.

Current Affairs

Recent Posts