The Global Minimum Tax Agreement: Why It Matters For America’s Small Businesses

This week, leaders from the G20 (or Group of Twenty), an intergovernmental forum of 19 countries and the European Union, are meeting on a number of issues related to the global economy. One critical item is an international tax agreement on a global minimum corporate tax rate of 15% for multinational corporations. This agreement forged by the Biden Administration with nearly 140 countries is the first of its kind and could be a milestone in tax fairness for small businesses if Congress ratifies it. 

For decades, small businesses have been crushed by a race to the bottom where big corporations can leave our country or hide their profits offshore for lower tax rates. It is called the race to the bottom because countries continue to reduce their tax rates to encourage multinational corporations to ship their jobs and profits offshore. For example, the federal corporate tax rate was 21% in 2020, but much lower in countries known as tax havens. Some of these havens, such as the Turks and Caicos and Cayman Islands which have a statutory tax rate of zero, have been made famous through crime and spy novels, while others like Barbados  (5.5%) and Ireland (12.5%) are lesser known. Even when accounting for corporate tax credits and deductions, the U.S. still had a higher effective tax rate (8%) than the top 10 tax havens (4%) in 2018.

When corporations are able to take advantage of these loopholes and somewhat perverse incentives, American small businesses and workers suffer and the wealth gap widens. A Financial Accountability and Corporate Transparency Coalition briefing memo reports that a global minimum tax, “levels the playing field between U.S. multinationals and U.S. domestic businesses and other taxpayers who cannot take advantage of aggressive tax planning.” Here are three ways this could benefit small businesses.

1. Fairer Taxes

An April 2021 Pew Research Survey found that 81% of Americans believe that U.S. corporations do not pay their fair share of taxes… for good reason. In 2018, married couples making about $150,000 working at their own small business paid more than 20% of their income in federal income and self-employment taxes. By contrast, U.S. multinational corporations paid less than 10% in corporate income taxes on U.S. profits. Not only is this unfair, it also makes it harder for small businesses to have the capital they need to grow their business and operate in the same space as corporations. A May 2021 survey from Small Business for America’s Future found that small businesses are feeling the impacts of these pressures, with a staggering 76% of small business owners saying they are harmed when corporations use loopholes to avoid taxes. A global minimum tax will help reduce this disparity.

2. Stronger Main Streets

One of the reasons Main Streets are suffering today more than they did decades ago is due to companies moving jobs and profits offshore. A constant truth since our country’s founding is that vibrant Main Streets are a sign of a strong economy. President Biden’s international tax reforms eliminate the incentives to shift jobs and profits abroad and ensure that multinational corporations pay their fair share here at home. This will lead to a stronger economy, which will produce more robust Main Streets across the country.

3. Better Competition

Small businesses don’t have access to the army of lawyers and accountants that allowed 55 profitable large corporations to avoid paying any federal corporate taxes in 2020, and cannot shift profits into tax havens to avoid paying U.S. taxes like multinational corporations can. This in turn prevents small businesses from being able to compete with larger corporations in a number of areas, including providing competitive wages and opportunities for growth. This new tax agreement will give small businesses greater ability to operate alongside corporations, even if they do not have the same infrastructure.

This minimum global tax agreement is unprecedented, but Congress still needs to pass legislation to ratify it. Generally all lawmakers on both sides of the aisle have said they fully support robust Main Streets and ratifying this agreement is a way to show that they mean it.