The Impacts of Biden’s Global Tax Rate at Home and Abroad
The Global Minimum Corporate Tax Spells Disaster
By Joseph Sullivan – Senior Advisor, Lindsey Group; Former Staff Economist, White House Council of Economic Advisers
The push to create a global minimum corporate tax rate is one of the Biden administration’s signature initiatives on international economic policy. U.S. Treasury Secretary Janet Yellen has spearheaded the effort. And in early October, 130 countries agreed to a global minimum rate of 15 percent, the rate favored by the Biden White House. The announcement may understandably be leading the White House and Treasury Departments to pop the champagne.
If so, they will likely end up, in hindsight, having popped it too early. The global minimum tax is unlikely to succeed in the way that its advocates think it will. There are three main reasons it is likely to disappoint its proponents.
I. The Complexities of Compliance
First, countries are unlikely to comply in the comprehensive way that the policy’s defenders envisage. A world where every national government adopts the fairly complex and technical set of principles of taxation agreed upon within the Organization for Economic Cooperation and Development (OECD) is not arriving anytime soon.
The United States itself is a case in point in the obstacles likely to greet governments as they try to implement the agreement. In its current form, the OECD agreement by itself is no more binding on the United States than a tweet from the President’s account. The executive branch’s current leaders can release any press statement they want. But the United States may not be in legal compliance with the new tax agreement if Congress does not change U.S. tax law. If it does not, companies that do business with America could face new penalties due to Congress’ inaction. Yes, Secretary Yellen is probably correct to think that Congress can pass some type of new tax legislation to give effect to the global agreement. But it is likely to be a party-line vote and unlikely to change the U.S. tax code by any more than the minimum that gives the Biden administration a plausible case for arguing that it at least tried to comply with its own deal. The deal in its current form phases in over ten years, a timeframe incompatible with the timetable of American electoral politics. If Republicans control Congress, do not count on them looking to the OECD for their tax agenda.
II. A New Global Race to the Bottom
Second, even if countries do miraculously comply, the likely effect is not to end the kind of economic competition between individual countries that, collectively, causes governments to lose money. Rather, the likely effect is to change only the form that this costly competition takes. But this competition is exactly what advocates of a global minimum corporate tax lament.
Many, including Secretary Yellen, often talk of the agreement as a way of ending the “global race to the bottom” in corporate taxes. The “race” they are referring to happens between governments as they try to compete for global corporations to locate jobs in their territory. Historically, one way they competed was by having lower corporate tax rates. By putting a floor underneath the tax rates that any one country can set, the logic goes, governments can stop having to compete in this manner. The theory is elegant. In practice, however, governments are likely to continue to try to lure investment to their shores and create jobs for their citizens. They will do it by offering companies subsidies rather than lower taxes. And economically, there is no difference between a subsidy and a tax cut. Both cost governments and give corporations more money than they otherwise would have.
Sure, the OECD agreement does appear to target subsidies as well as formal tax rates. In practice, unless you try to eliminate the ability of governments to incentivize firms at all, any set of rules is likely to be rife with ambiguity that gives rise to gamesmanship. To say that the agreement ends a costly race to the bottom in the global economy is less accurate than saying that it changes the type of race that governments can play. But if the problem the tax agreement attempts to solve is international competition that deprives governments of revenue, this is a distinction without a difference.
III. Misunderstanding the Nature of Tax Havens and Offshore Finance
Third, you may think that the global minimum corporate tax has something to do with tax havens used by rich individuals, and even world leaders, to launder wealth away from the eyes of tax authorities. You can be forgiven. One false narrative about the global minimum tax is that it has a lot to do with the scandalous and illegal financial activity that recent leaks of secret documents like the Pandora Papers tend to uncover. You can read in the New York Times that the tax agreement could “end a decades-long race to the bottom on corporate taxation that has allowed tax havens to flourish and has drained countries of revenue.” But it is simply not true and reflects a common bout of confusion.
The confusion stems from the ambiguity of the phrase “tax haven.” Different people use the phrase to refer to different types of tax behavior. But a tax haven in the sense of the illegal activity highlighted in the Pandora Papers has almost nothing to do with the taxation of large corporations, who have used legal means to lower their tax bills. Among the scandals unearthed in the Pandora Papers is the failure of the Czech prime minister to declare the purchase of two French villas. Another is the purchase of tens of millions of dollars worth of real estate in the United States and the United Kingdom by the King of Jordan. Neither of these transactions would be affected by the new global minimum corporate tax. The Czech prime minister nor the King of Jordan are not corporations. The types of offshore companies they seem to have used to move their money are not the type of revenue-generating firms that would actually pay more under the minimum global corporate tax agreed to by the OECD.
Nor are adherence to the law and financial transparency, laudable goals in their own right, priorities best addressed through corporate tax policy. If you are turning to corporate tax policy to right the wrongs revealed in documents like the Pandora Papers, you are turning to the wrong tool for the job. The U.S. Senate did pass bipartisan legislation that would increase financial transparency precisely into transactions like the King of Jordan buying beach houses. Passed in January 2021, no one thought to link this to corporate tax policy. Why? Because tax havens and offshore finance have very little to do with corporate tax policy.
A Once-in-a-Generation Disappointment
One tell of the likely impotence of the new corporate tax policy comes from the stock market. Expectations of tomorrow’s tax policy do affect today’s stock prices, so you would think that higher corporate taxes would lower stock prices. But stock prices seem to have barely moved an iota even as the Biden administration announced it had secured a “once-in-a-generation accomplishment.” The Biden administration’s desire to boast of a policy victory is easy to understand. But those counting on the global minimum corporate tax agreement to actually be a “once-in-a-generation” transformation of the global economy are setting themselves up for a once-in-a-generation disappointment.
Despite Its Advances, The Global Minimum Tax Largely Benefits Developed Nations
By Abby Maxman – President & CEO, Oxfam America and Robbie Silverman – Senior Manager, Private Sector Advocacy, Oxfam America
For many years, the race to the bottom on corporate tax appeared to have no end as countries competed against each other to lower their tax rates and corporations were too willing to take advantage. The global minimum tax is a major step to halt the race to the bottom, curb corporate tax haven abuse, and reduce the incentive to offshore American jobs. At the same time, it will raise desperately needed revenue to advance President Biden’s Build Back Better plan to create jobs, strengthen the care economy, and address climate change.
The agreement is far from perfect. The final agreement signed by 136 nations earlier this month is not as strong as the Biden administration advocated for, nor does it satisfy all of the demands of the tax justice movement, including Oxfam’s. Perhaps the biggest failing is the lack of support for developing countries, which will not benefit as much as they should considering the dire needs created by the global pandemic.
Yet the agreement is good news for the United States. The global minimum tax is meant to address two distinct problems: tax avoidance and tax competition.
Tax Avoidance and Tax Competition
Tax avoidance (aka “aggressive tax planning”) is the use of accounting tricks by multinational corporations to shift their profits from high to low-tax countries. This reduces their global tax bill at the expense of the rest of us – workers, consumers, small businesses – who must pick up the tab. Estimates vary but it may cost governments around the world about $245 billion a year.
Tax competition (aka “the race to the bottom”) is the attempt by governments to lure foreign investment by lowering corporate tax rates or granting targeted tax exemptions. It has been shown to be largely ineffective, but politicians continue to give in to corporate lobbyists’ demands. This also shifts the tax burden onto workers, consumers, and domestic businesses.
The global minimum tax essentially puts a floor under both tax avoidance and tax competition. It is a global agreement that guarantees that all large multinational corporations (wherever they are based) pay a tax rate of at least 15% on the profits that they generate in any country where they operate or stash their profits. Each country can continue raising corporate taxes as they wish, but if a multinational corporation pays less than 15% in a tax haven, the countries that are part of the agreement collect the difference between 15% and the lower rate paid to the tax haven. The agreement thus allows any country to protect itself against reluctant or incomplete implementation by other countries.
The Call For A Higher Tax Rate
Like the Biden administration, Oxfam is calling for a higher rate than 15%, which is barely higher than the rates of notorious tax havens like Ireland, for example. A low floor limits the effectiveness of the tax. While zero-rate tax havens like Bermuda may go out of business, it may still be worthwhile to shift paper profits from countries with rates around the 25% global average to countries like Ireland, Switzerland, or Singapore where the 15% minimum rate will apply.
Moreover, 15% will not be the true minimum. The final agreement includes “carveouts” that allow countries to continue some degree of tax competition below the minimum.
Benefits for Developed Nations
Overall, the agreement is biased against developing countries because the global minimum tax will be collected in priority by the countries where multinational corporations are headquartered, which are overwhelmingly rich countries. Most developing countries are likely to gain next to nothing in direct tax revenue from the global minimum tax itself, although all countries are expected to eventually see their normal corporate tax revenue rise thanks to the expected global decline in both tax avoidance and tax competition. There was no need to design the global minimum tax in a way that funnels its direct, tangible, and immediate benefits to rich countries alone, and it is shameful that the international community went down that path.
Unsurprisingly, this is a good deal for the United States. Congress is poised to align current U.S. law to this new global standard as part of the Build Back Better bill, which will raise tens of billions of dollars a year. Now that this global agreement is in place, failure by Congress to act (or attempts by future Congresses to roll it back) would be self-defeating as it could result in other countries taxing U.S. multinationals more.
Congress can and should set higher rates than 15% on both domestic and foreign profits of U.S. corporations. The global agreement undermines multinationals’ claims that higher taxes will harm their competitiveness.
Similar International Agreements
The global minimum tax should not be criticized for failing to do what it is not meant to do. Nothing in the global minimum tax agreement prevents countries from competing for foreign investments through subsidies instead of tax breaks. Other international agreements like the World Trade Organization’s Agreement on Subsidies and Countervailing Measures address that. Besides, from a political economy perspective, it is harder for corporate lobbyists to get less visible tax breaks than subsidies which directly compete with budget lines that people care about.
While the global minimum tax will make a significant dent in corporate tax avoidance, it is not meant to address tax evasion by individuals using shell companies in tax havens. Another law takes care of that: the Foreign Accounts Tax Compliance Act (FATCA). Since its introduction in 2010, it has been fairly effective at dissuading and prosecuting rich Americans who abuse tax havens. Therefore, it is not surprising that few Americans were featured in the recent Pandora Papers scandal. Those same Pandora Papers highlighted another problem instead: the United States has become a prime tax haven for rich foreigners cheating their own tax authorities. For tax justice advocates, that is a fight for another day.
In Response to Abby Maxman and Robbie Silverman
By Joseph Sullivan – Senior Advisor, Lindsey Group; Former Staff Economist, White House Council of Economic Advisers
The Tradeoff Between Revenue and Jobs
Maxman and Silverman’s defense of the global corporate tax has as much clarity of thought and expression as any. Their clarity illuminates the pitfalls of the global corporate tax as envisioned by the Biden administration.
They concede that, were it enacted, the Biden administration’s own corporate tax policy would condemn America to suffer from the very problem the global minimum corporate tax is supposedly intended to solve. As Maxman and Silverman point out, the global “race to the bottom” is a problem because it compels national governments to choose between raising tax revenue or risking a loss of economic competitiveness and, therefore, jobs. But the Biden administration’s proposal is for the world to have a global minimum corporate tax of 15% and America’s to be 28%, higher than its current 21%. This is simply a choice to become less competitive. If the Biden administration’s policy was for America to have a corporate tax that avoided the old tradeoff between revenue and jobs, it would propose a new corporate tax rate at the new global minimum of 15.
A Historical Parallel: Failing on the World Stage
But the U.S. Senate may not even be able to comply with the terms of the global deal negotiated by the Biden administration, a failure that would likely taint Biden’s global corporate minimum tax initiative with the type of historical ignominy that shrouds Woodrow Wilson’s doomed League of Nations. Democrats in the Senate may, it appears, lack the unity to raise the U.S. corporate tax on global intangible low-tax income from 12.5 to 15. If so, the U.S. may be in violation of the global minimum corporate tax policy that the Biden administration has negotiated with foreign governments. The ignominy of a starry-eyed American president’s attempt to lead the world into a new global agreement, only to fail to sufficiently mobilize his own country behind him, would now greet the 21st century like it once did the 20th. Now as then, a failure of American leadership would likely forebode a new era of global disorder. U.S. non-compliance would allow foreign governments to basically start fining American corporations, which would then likely pressure the U.S. government to retaliate in turn. The likely result would be tit-for-tat tax wars, a novel variation of the familiar variety of tit-for-tat trade wars.
Despite its shortcomings, the idea of a global minimum corporate tax was always interesting, if nothing else. And in success or failure alike, it is poised to stay interesting.
In Response to Joseph Sullivan
By Didier Jacobs – Senior Policy Advisor, Oxfam America
At the time of writing, the House of Representative is set to adopt a foreign corporate rate of 15% (the GILTI rate), in line with the global minimum tax, and keep the domestic corporate rate at 21%, below the average of our main trade competitors. Congress has thus decided not to go above and beyond the global minimum tax. We believe that is a missed opportunity. M. Sullivan is right that in theory higher tax rates could hurt American competitiveness and jobs other things equal. But in practice other things are not equal. The United States boasts the biggest market in the world, dynamic entrepreneurship, an educated workforce and the best universities, good infrastructure (which the higher taxes will improve), and strong rule of law. Our country is a destination of choice for foreign investment and can afford to charge higher tax rates. Before the global agreement, the tax rate that foreign multinationals paid on their foreign profits was 0%, compared to 10.5% for US multinationals. That was a gap of 10.5%. It did not prevent US multinationals from posting record profits. After the global deal, foreign multinationals will pay 15% tax on their foreign profits. The United States can afford to increase the GILTI rate to 21% as the President called for. That would still reduce the gap to 6%, and so improve the competitiveness of US multinationals in relative terms.
Although not final, it does seem that Congress will comply with the global minimum tax by amending the GILTI/BEAT regime as part of the Build Back Better Act. M. Sullivan is right that failure to do so would incur cost for US multinational corporations. Other countries would be allowed to collect the taxes that the United States fails to collect from them. (We would not characterize that as “fines”, but rather as normal tax revenue raised in the framework of an international agreement that the United States itself championed.) This element of the global agreement is what makes it sustainable. If countries choose to opt out of the deal, they hand over tax revenue to countries that opt in. And that holds for the United States as well: if Congress were to undo this deal in the future, it would leave money on the table for others to grab. There is the end to the race to the bottom.
This article is part of Divided We Fall’s “Civility Without Borders” series, covering a range of topics fundamental to U.S. foreign policy. Through this series, we ask scholars, journalists, government officials, and activists to discuss the most pressing issues in international affairs. If you want to read more pieces like this, click here.