The Political Economy of G7 Agreement on Taxes

A joint communiqué issued by the finance ministers and central bank governors of the Group of Seven (G7) countries, after their meeting in London in the first week of June, took most people by surprise. This was mainly because of the strong support they extended to the efforts of the Group of Twenty (G20) and Organisation of Economic Cooperation and Development (OECD) countries. The G20–OECD’s efforts involve the twofold objective of tackling the tax challenges arising from the globalisation and digitalisation of the economy, and the adoption of a global minimum tax. In practical terms, this would mean a reallocation of taxing rights on a portion of the excess or residual profits of the largest multinational companies in proportion to the distribution of their market activity across different tax jurisdictions and also an initial global minimum tax rate of at least 15% on them.

While the first measure will help countries to potentially mop up between $100 billion and $240 billion of annual revenues lost due to the strategic tax planning of multinational companies, the second one will stop the competition between countries in lowering corporate tax rates and finally end this race to the bottom. Overall, these two measures are rather radical steps that would help, as pointed out by the finance minister, to build more stable tax systems to mobilise sufficient revenues for investing in essential public goods and to tackle any crisis, by ensuring a more equitable sharing of the burden of financing governments by both citizens and corporations.