Over the weekend, G7 nations, along with U.S. Treasury Secretary Janet Yellen, reached an agreement on a global minimum tax of 15 percent after years of discussions at the OECD. At a basic level, the framework will prevent companies from shifting profits to low tax jurisdictions and ensure the biggest multinationals pay more tax in the countries in which they operate.
According to Ms. Yellen, “that global minimum tax would end the race-to-the-bottom in corporate taxation and ensure fairness for the middle class and working people in the U.S. and around the world.” The plan must still be approved by Congress and is likely to face opposition from the Republicans.
The first obstacle is that national legislatures think it is their prerogative — not the OECD’s — to shape national tax policy. At some moments, legislative bodies want to raise business taxes to pay for public investment or social welfare — like the Biden administration today. At other moments, legislative bodies want to lower business taxes to encourage private investment in capital goods and R&D and attract firms from abroad — like the Trump administration in 2017. If legislative bodies are confronted with a global minimum tax rate that interferes with their pro-business aspirations, or help for favored industries, they will resort to assorted workarounds.
Remember the simple equation: Tax collected from a firm = (Tax rate) x (Tax base) - (Tax credits). If the global minimum rate seems too high, pro-business legislatures will reduce the tax base by creating more deductions (e.g., 150% write-off for new investment) or inventing new tax credits (e.g., a 50% tax credit for R&D outlays). Or, as the Biden administration is now planning, give public subsidies (equivalent to negative taxes) for preferred industries, such as semiconductors, 5G telecoms, quantum computing, artificial intelligence and more.
The support for a global minimum tax rate from Ms. Yellen comes on the heels of the release of President Biden’s massive infrastructure and tax plans that include a proposal to raise the domestic corporate tax rate from 21% to 28%. That plan would put the U.S. 4 points higher than the average which the Tax Foundation concludes is around 24% across 177 countries.
The mission of the administration: Make corporations pay their fair share and eliminate the methods corporations use to shrink taxes owed. However, putting the U.S. at the high end of the tax rate spectrum among other advanced countries could seriously undermine U.S. competitiveness. If corporations end up owing more under the new tax rate plus the administration’s proposal to impose a 21% minimum rate on foreign earnings, many firms will reduce investment in plant and equipment and R&D, and over time some firms will just cut ties and move abroad.
Just recently, a survey from the Business Roundtable found 98 percent of its member CEOs agreed that increases in U.S. domestic and international tax rates would have a significant adverse effect on their company’s competitiveness, and that negative effects could permeate to business expansion, hiring and wage growth, and investment.
Mr. Biden’s tax plan would stifle commercial activity in other ways. In the president’s budget proposal for 2022 recently unveiled, he eliminates tax “subsidies” for oil and natural gas companies, in order to prioritize clean energy. The administration proposes to cut tax preferences ranging from intangible drilling costs to, ironically, air pollution control equipment.
The ability to recover costs related to ongoing operations, new investment and job creation are available to all businesses under the U.S. tax code. These deductions are not “subsidies”, in the customary sense of money granted by government to promote specific objectives.
Nevertheless, targeting oil and gas industry earnings could undermine economic recovery in several states and hinder the transition to solar and wind by major energy firms. The energy industry already provides billions to federal revenues and supports millions of jobs up and down its supply chain. As well, state severance taxes on oil and gas contributed an estimated $14 billion to state treasuries in 2019 alone.
The tax proposals floated by Mr. Biden have a long way to go before legislation reaches the president’s desk. Among other changes, opposition from fellow Democrats in the House and Senate from energy-producing states, like Sen. Joe Manchin, West Virginia Democrat, will require concessions. Now is the time to start designing a viable path forward.
• Gary Clyde Hufbauer is an economist and nonresident senior fellow at the Peterson Institute for International Economics. Opinions expressed are his own.