By Marc J. Lane
U. S. Treasury Secretary Janet Yellen’s proposal to achieve wider tax parity among nations and tamp down on companies moving from one country to another to cut their tax bills has now gained the support of all the G20 nations, the world’s largest economies, and nearly every member of the Paris-based Organisation for Economic Co-operation and Development. Should a definitive agreement be struck, as it likely will in October, a minimum income tax rate of 15% would apply to corporations globally and multinational companies would be required to pay more in places where they operate wherever they may be headquartered.
Secretary Yellen, who has pitched a 21% minimum tax rate on U. S. firms’ global taxable income, argues that equity and competitiveness are at stake. As she put it. “For decades, the United States has participated in a self-defeating international tax competition, lowering our corporate tax rates only to watch other nations lower theirs in response. The result was a global race to the bottom: Who could lower their corporate rate further and faster? The race to the bottom is one step closer to coming to an end. In its place, America will enter a competition that we can win, one judged on the skill of our workers and the strength of our infrastructure.”
A global minimum tax is also an integral part of President Biden's domestic agenda, a way to help fund his sweeping infrastructure plan. The president’s budget proposal estimates it could raise nearly $534 billion over 10 years. The Administration sees the tax agreement as a matter of basic fairness: a stable tax system would raise the revenue we need to invest in essential public goods and to ensure that all citizens and corporations fairly share the burden of financing government.
But not everyone agrees. Some U. S. conservatives see a global minimum tax rate as depriving the people in sovereign countries of their right to decide on their own tax structures and rates. They believe that government spending and taxing is already too high to maximize job growth and national income, and that corporate income taxes unfairly hit the most productive inputs of capital and labor.
As Grover Norquist, president of Americans for Tax Reform, wrote in a letter to U.S. policymakers, “Cartels that keep prices high hurt consumers. Creating a tax OPEC of governments to avoid tax competition is bad for citizens and taxpayers. Competition drives out self-serving rent-seekers in business and in government.” Striking a similar note, Rep. Kevin Brady (R-Texas) has said that if a multilateral agreement is reached it will provide advantages for “foreign companies and workers over American ones.”
The truth is that the tax treaty would be imperfect. At 15 percent, the minimum tax might only eliminate the most egregious tax avoidance, raising about $150 billion for governments worldwide. Compare that to the $500 billion or more the International Monetary Fun reports is lost to tax havens every year. And a minimum tax rate won’t be of much help poorer countries since large multinationals aren’t based there.
Still, governments would be clawing back a meaningful chunk of the revenue they’re unfairly losing to tax avoidance. And revenue-raising powers would be allocated more equitably among nations.
Despite its flaws, Secretary Yellen’s proposal is likely to get through Congress via the fast-track reconciliation process in the Senate, Republican opposition notwithstanding . Taxing companies where they generate sales and earn profits shouldn’t be applauded as the end of a global tax revamp, but would be a solid start worth embracing.
Please feel free to reach out to Marc Lane, in confidence, at email@example.com or 312/372-1040. He’ll be happy to help you optimize your tax strategy.