What is the "Global Minimum Tax"?

Recently, while at a campaign stop in Iowa, Vice President Joe Biden called for a "Global Minimum Tax." Here's what he said:

"For years, American manufacturers have faced one of the highest tax rates in the world. We want to reduce that by over 20%. We want to drop the rate, particularly, for high-tech manufacturers like you, Mr. President, even further than the 20%. We want to create (what's called) a global minimum tax, because American taxpayers shouldn't be providing a larger subsidy for investing abroad than investing at home."

Many people were shocked. Was Biden suggesting that the U.S. would try to implement some form of taxation on a supranational basis?

 Such a suggestion would not necessarily be new in the U.S. political sphere. In 2009, New York Times columnist Paul Krugman wrote in support of a "Tobin tax," which would levy a tax on all conversions of one currency into another. In late 2011, Bill Gates also announced his support for a "Tobin tax."

The "Tobin tax" is named after economist James Tobin. James Tobin argued for his tax idea in a 1978 article in the Eastern Economic Journal titled "A Proposal for International Monetary Reform." In it, he voices support for globally implementing "a common currency, common monetary and fiscal policy, and economic integration" but acknowledges that this is not politically viable. Instead, he suggests the tax on currency exchange which would "be an internationally agreed uniform tax" where the "tax proceeds could appropriately be paid into the IMF or World Bank."

So indeed there has been a serious proposal for a global taxation authority in U.S. politics in the recent past. It's no secret that Paul Krugman's policy writings are a major influence over the Obama administration.

Alas, I don't believe this is what Vice President Biden was referring to. Biden was referring to Gene Sperling's proposal to tax the foreign profits of U.S. based companies and corporations. Gene Sperling is the Director of the National Economic Council. Lawrence Summers held the post before him. Mr. Sperling worked in the Clinton Administration, was on the staff of the Council on Foreign Relations, worked for Goldman Sachs and is a close associate of Timothy Geithner.

Sperling's proposal is astounding. Let's deconstruct the proposal by analyzing Biden's words.

"For years, American manufacturers have faced one of the highest tax rates in the world."

Biden presents this as a wrong that the Obama administration is out to correct. He completely overlooks the fact that the Democratic party played a major role in raising that tax rate to the uncompetitive level it is now at.

"We want to create (what's called) a global minimum tax, because American taxpayers shouldn't be providing a larger subsidy for investing abroad than investing at home."

This is a completely Orwellian way of speaking about the tax proposal. Essentially, Biden is admitting that high tax rates in the U.S. have forced manufacturers to go abroad in order to stay competitive in international markets. American taxpayers are not subsidizing foreign investment. Manufacturers have been pushed into foreign investment by a greedy U.S. government that can't control its spending.

Biden never touches upon the risks of this proposal. He ignores the possibility that, instead of bringing manufacturing jobs back to the U.S., companies may simply officially relocate themselves to foreign countries in order to thereby avoid the U.S. tax structure almost entirely. Such a development would be a tremendous blow to the U.S. economy during a fragile period.

In both of the above cases, the "Tobin tax" and Gene Sperling's "Global Minimum Tax," the goal is to limit competition between different economic systems and instead corral everyone into a unitary, uniform financial structure. The "Tobin tax" would make it more expensive to convert your U.S. dollars into a foreign currency. And any such transaction would be subject to regulation by supranational entities like the International Monetary Fund and World Bank, which are not responsible to any electorate. The "Global Minimum Tax" negates any benefit one might attain by doing business abroad. It is a financial "fence" meant to keep you and your money within the confines of the U.S. tax structure, even if there are far better economic opportunities abroad. This will likely end up greatly limiting U.S. investors and pricing them out of key international markets.