Knowing the Rules

by Timothy D. Carkin, CAIA, CMT
Senior Vice President

Knowing the Rules

I played a lot of football at recess when I was in elementary school. At the beginning of each year, there would be some jockeying for who brings the ball outside and whose rules we will play by. Those rules might not be the same as last year, but we all agreed, and the games began. By the middle of October everyone races out to play, you know who the strong kid or the fast kid is, and you know how to exploit some inane adolescent-created rule. Scores are kept in binders and games are legendary. That’s usually when the “council of older kids” decides they need to re-write the rules once again and the cycle of learning recess football starts again. The moral of this story is simple: certainty in the rules is what makes the game fun.

Treasury Secretary Janet Yellen called for a global minimum tax in a speech this week coinciding with the Biden administration’s call for a corporate tax increase. Just like the rules of recess football, it’s not the rate that’s important, it’s the certainty in the rules itself that matter.

What is a Global Minimum Tax?

In her first major speech as U.S. Treasury Secretary, Janet Yellen proposed an unprecedented global agreement on taxation. The proposal is for G-20 countries, the largest economies in the world, to get together and agree on a non-binding tax rate for multinational companies. Yellen believes this will halt the “race to the bottom” and “level the playing field” globally. Countries like Ireland and Switzerland have enacted near-zero corporate tax rates in order to entice large multinational companies to move assets to those countries and take advantage of the tax rates. This suggested tax would allow the “home country” of a multinational to assess a tax to “true-up” the overall tax rate a company pays, negating some of the benefit from the low-tax jurisdiction.

A tax rate is a powerful lever countries can pull to entice businesses to move facilities and headquarters to their country, so it is no surprise that some countries are more aggressive with their tax rates than others. However, that isn’t the only lever they can pull. There are myriad subtleties in the tax code that can entice companies to move. And that is where the recess football analogy comes into play. There is talk of re-writing the rules, which of course makes the players nervous. Companies know the game right now and are playing by this known set of rules. These corporations may hold off on decisions related to how large facilities should be and where these facilities are built. The good news is that this proposal is a large change on a global scale and would require the U.S. Congress and other major world governments to agree. There will be plenty more information released as this idea is debated; whatever the outcome, the less uncertainty when it comes to the rules, the better the game is to play.

Week in Review and Our Takeaways for the Week

  • The S&P 500 registered its 20th all-time high of the year this week on strong gains in technology stocks and yields retreating from recent highs

  • It is too early to speculate on the outcome of the tax debate in Congress, but companies are focused more on the certainty of the outcome, rather than the headline rate

Disclosures