Ball Of Confusions (That’s What The Tax World Is Today)

Originally published: April 2024

In their epic 1970 track Ball Of Confusion (That’s What The World Is Today), the Temptations sing “politicians say more taxes will solve everything” (https://lnkd.in/ev9UJN8d). Tax rises remain unpopular, but the thought of new taxes and new sources of income appeals to politicians. As government deficits keep growing and the low interest rate environment is over (https://lnkd.in/ewAmFDUG), this idea becomes politically more appealing. We have seen those dynamics with OECD’s global minimum tax Pillar 2 (P2) which collects tax separately from the existing corporate tax system through another layer of tax. OECD’s Pillar 1 (P1) works differently, as it shifts tax base between countries (meaning some countries lose tax base too), but defenders usually see it as a revenue raiser too. Attempts by the Biden Administration to align the US tax system closer to P2 failed, but they did enact a “Corporate Alternative Minimum Tax” (CAMT) which also applies an overlay on existing tax. Biden’s billionaire tax would apply this thought to personal tax, but the plan hasn’t gotten off the drawing board. And some critics see scope for a global minimum tax for inheritances too (https://lnkd.in/e4iNdpQ2).

The global minimum tax for billionaires as seemingly endorsed by the G20 (https://lnkd.in/e98cPCjZ https://lnkd.in/eRpErDXu) should be seen in the same light. It is another overlay to bring in new revenue which avoids an increase of existing rates. Some of the burden falls on foreign billionaires, which helps its appeal for countries without many billionaires. It uses P2 terms and concepts, which helps its political appeal and make it seem more respectable.

P1 and P2 were designed after lack of progress on BEPS Action 1 (digital economy) threatened to lead to digital service taxes (DSTs) and tax led trade wars. The OECD often reminds critics that the aim was to prevent a Ball Of Confusion and that justified design choices departing from the consensus (eg UTPR). Many UTPR critics pointed out that UTPR created a blueprint to undermine the arm’s length and double tax treaty structure (https://lnkd.in/expT2NJs). The success (and indeed failings) of P1 and P2 have reinvigorated many tax policy debates, creating new, seemingly strange ideas (also helped by the tax policy debate turning global due to P2 https://lnkd.in/ebMbJUFC). The new tax ideas over the last months and they vary wildly.

So, I think the Temptations were right and (1) politicians do think that more taxes will solve everything and (2) the tax world is just a ball of confusion today.

Obvious disclaimers: this is not advice. These views are my own and do not necessarily represent my employer.

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