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...