After four years of President Donald Trump's "America First" approach to the economy, the U.S. is taking the lead in a global conversation around what major companies owe the governments and taxpayers who buy their goods and services.
Treasury Secretary Janet Yellen on Monday called on the world's most powerful nations to pass a global minimum corporate tax of 21 percent to create "a more level playing field" for the multinational corporations that draw profits from across the globe.
The tax could strike at the heart of a global system that rewards countries that offer low corporate tax rates and spurs employers to shuffle around the world looking for the best deal.
"We're working with G20 nations to agree to a global minimum corporate tax rate that can stop the race to the bottom," Yellen told the Chicago Council on Global Affairs in a virtual speech.
The secretary made the comments a week after the Biden administration proposed raising the U.S. corporate tax rate from 21 percent to 28 percent as part of a $2.3 trillion infrastructure bill.
While the debate over the massive spending package is just heating up, Yellen's speech looked beyond the country's domestic scene to the stability of the whole world economy.
"Competitiveness is about more than how U.S.-headquartered companies fare against other companies in global merger and acquisition bids," she said. "It is about making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods."
The Value of Corporate Taxes
At stake in this debate is a large chunk of U.S. tax revenue. In 2019, corporate taxes raised $230.2 billion, which totals 6.6 percent of all federal revenue, according to the Tax Policy Center within the Brookings Institution.
The forecast for 2020, which is still being tabulated, is slightly lower at $212 billion, and is anticipated to drop even more this year to $164 billion due to the COVID-19 pandemic, according to the Congressional Budget Office.
Biden's proposal to raise the domestic rate to 28 percent — which is still below the 35 percent rate that was in place prior to the 2017 Trump tax reform bill — aims to raise an additional $2.5 trillion in revenue over the next 15 years. This is the backdrop for Yellen's bold proposal.
When asked about whether his proposed corporate tax hike would lead companies to leave the U.S., Biden in a recent press conference said the idea was "bizarre" — but that outcome is exactly what a global minimum corporate tax seeks to avoid.
Corporate tax rates around the world vary significantly. On the low end, Barbados has a rate of 5.5 percent, and on the high end is Comoros, a tiny archipelago off the coast of East Africa, with a rate that goes as high as 50 percent. A number of countries, of course, including the Cayman Islands, Bermuda, and the Bahamas, have no corporate tax rate at all, making them havens for incorporation.
These countries break the mold, however, as the worldwide average for a statutory corporate income tax rate is 23.85 percent, or 25.85 percent when weighed by GDP, according to the Tax Foundation, a right-leaning research institute.
While that's already above Yellen's proposed minimum, the goal would be to pull in those outlying countries that have lowered their rates to compete for multinationals.
No single country is likely to bring that kind of pressure on its own, which is why Yellen is calling on global organizations such as the 37-nation Organisation for Economic Cooperation and Development (OECD) and the G20 to support the proposal.
So far, other powerful countries at least are responding positively.
The G20 gathered virtually on Wednesday to discuss Yellen's proposal, among other issues, and several European finance ministers offered their support, echoing the U.S. treasury secretary's concerns that the current system is creating a race to the bottom.
The European Commission also said it supports the idea, but that the issue should be decided in talks underway in the OECD, which has been debating this topic, among other global trade issues, for the past two years.
"We remain committed to ensuring that all businesses, including digital ones, pay their fair share of tax, where it is rightfully due," said Dan Ferrie, spokesperson for the Commission, during a news briefing.
Ferrie declined, however, to endorse a particular rate, leaving some leeway for future negotiations. Across the continent, corporate tax rates range from below 10 percent to above 30 percent.
The International Monetary Fund also endorsed the idea, stating that those who have done well during the pandemic can afford to pay more in taxes.
Not every European nation was on board, however. Irish finance minister Paschal Donohoe said on Wednesday that a global minimum could hurt economies looking to spur economic growth, highlighting what could shape up to be a conflict of interest between large countries looking to retain corporate tax revenue and smaller countries looking to draw more companies to within their borders.
"The focus on a global minimum tax rate is a prospect that I do have reservations about...on what would be the impact of that on the competitiveness for smaller and medium-sized economies that do have lower rates of corporate taxation and use that as part of their overall competitive model," Donohoe said during a press conference.
Ireland, notably, is widely considered a tax haven for its low rates and lenient corporate tax code.
A Fair Share
At the center of the debate over a minimum global corporate tax rate is a tension between fairness and flexibility. Proponents of the idea argue it would create economic stability worldwide and help avoid the kind of competitive offshoring and onshoring that benefits some countries while sapping others of their tax base. Opponents say it takes away an important tool for countries trying to spur economic growth within their borders.
In an op-ed for CNN, Daniel Bunn and Scott A. Hodge of the Tax Foundation wrote that the tax "would significantly curb countries' autonomy in using tax policy to stimulate investment, while also setting a ceiling for global productivity and the speed at which we can recover from today's pandemic-driven downturn."
The economic challenges presented by the pandemic have indeed heightened the debate,
Nobel Laureate Joseph E. Stiglitz, with economists José Antonio Ocampo and Jayati Ghosh, penned an open letter to Biden arguing that tax avoidance and evasion by multinational corporations is one of the "toxic aspects" of globalization and that the administration should take active steps to stop it. Fellow economists such as Thomas Piketty also signed on.
The economists stressed the need to make sure countries got their fair share of tax revenue.
"By shifting their profits to tax havens, large companies deprive governments worldwide of at least $240 billion per year in fiscal revenues," they wrote. "This shortfall affects not only the United States, where some 50% of overseas profits made by US multinationals are transferred to tax havens each year, but also the Global South, where revenue sources are more limited and hence reliance on corporate tax receipts to fund public services is greater."
The letter also endorsed Biden's proposal to raise the tax on global intangible low-tax income (GILTI) from 10.5 percent to 21 percent. The GILTI tax was created by the 2017 reform bill to help capture more tax revenue on foreign earnings. In the past, U.S.-headquartered companies' foreign earnings were taxed at the regular corporate tax rate, but only if they repatriated them in the U.S. This meant many companies left their earnings overseas.
The Wall Street Journal editorial board came out against increasing the GILTI tax, saying it is effectively a double tax that won't re-shore jobs and limits investment.
Most G7 countries, including Japan, Italy, France, Canada, Germany, and the UK, exempt foreign earnings from taxation, making any global shift a tough sell.
Yellen acknowledged that it will be "important to work with other countries to end the pressures of tax competition and corporate tax base erosion" in order to make Biden's domestic corporate tax increases effective.