President Biden spent the weekend in Rome huddling with world leaders and advancing a milestone overhaul of global tax rules that they say will crack down on corporate tax scofflaws.
The new 15% global minimum tax, however, has been assailed for imposing costs on U.S. small businesses and consumers.
Beyond making it harder for big companies to avoid paying taxes, some economists say the new tax scheme will impact smaller U.S. businesses that support multinational corporations and make it harder for those businesses to break into international markets.
The minimum tax could cost the U.S. 500,000 to 1 million jobs and decrease investment by $20 billion, according to an August report by Ernst & Young, a multinational professional services network with headquarters in London.
“This is going to have a real impact,” said Rep. Kevin Brady of Texas, the ranking Republican on the House Ways and Means Committee. “At the end of the day, our foreign competitors are going to insist on a big bite of America’s tax revenues. None of this makes any economic sense for America, certainly not for our ability to compete and win anywhere in the world, including here at home.”
A White House spokesperson referred questions about the unintended consequence of the global tax to the Treasury Department, which declined to comment.
Mr. Biden secured a final blessing on the global minimum tax, his top priority when leaders of the Group of 20 industrial and emerging-market nations met Saturday and Sunday in Rome.
Italian Prime Minister Mario Draghi, the leader of this year’s G-20 summit, hailed the agreement as a victory for multilateralism.
“We reached a historic agreement for a fairer and more effective international tax system,” Mr. Draghi said. “These results are a powerful reminder of what we can achieve together.”
A senior White House official said the deal was about more than taxes and called it “a reshaping of the rules of the global economy.”
The official said Mr. Biden emphasized the importance of the tax agreement during his remarks at the G-20 summit.
“The deal works because it removes the incentives for the offshoring of American jobs. It’s going to help small businesses compete on a level playing field, and it’s going to give us more resources to invest in our people at home,” the official said. “It’s a game-changer for American workers, taxpayers and businesses.”
Earlier this month, 136 countries representing about 90% of the world’s economy agreed to the contours of a plan. Key details still need to be hammered out. Congress and the legislatures of several other countries need to approve the agreement.
The plan would subject the world’s largest and most profitable companies to a worldwide corporate tax rate of 15%.
Mr. Biden and other world leaders see the deal as a way for governments to collect more revenue from large corporations.
They hope to level the playing field by eliminating tax havens, which attract corporate investment and jobs with light levies on businesses. Governments worldwide lose nearly $600 billion annually in revenue to tax havens, according to the International Monetary Fund. The Treasury Department says the annual cost to the U.S. is more than $100 billion.
If approved, the minimum tax would create a collective global tax windfall of $150 billion, according to the Organization for Economic Co-operation and Development.
The global minimum tax would apply to corporations with annual revenue exceeding roughly $870 million. The country where a corporation has headquarters would be able to tax the business if it’s paying less than 15% to another country. For example, if a U.S. company pays 12% of its annual revenue to a country where it operates, the U.S. could collect the 3% difference.
Mr. Biden has separately proposed a 15% minimum tax for U.S. corporations that report more than $1 billion in revenue for three straight years. That provision, announced in Mr. Biden’s scaled-back social welfare and climate bill, would apply to about 200 companies.
The double whammy could mean more than 30% in new taxes for America’s largest businesses.
The Business Roundtable, which represents some of the largest companies in the U.S., said the two tax proposals would cost corporations billions of dollars.
“Together these proposals would impose $800 billion in tax increases on businesses, one of the largest tax increases in history.” the lobbying group said in a statement.
That should worry small businesses that rely on multinational corporations because the tax burden likely would be passed to them. Small businesses that provide services to multinationals could have their contracts terminated or reduced. Those that rely on multinationals for supplies could feel the pinch of increased costs.
The global minimum tax could hit small businesses especially hard, experts say.
“If you are a large company headquartered in the U.S., you are likely not doing everything by yourself,” said Daniel Bunn, vice president of global projects at The Tax Foundation, a right-leaning think tank that monitors global tax policy.
“You are relying on small businesses to supply parts to support your overall operations. It’s those small businesses that are most exposed when a large multinational sees a significant tax hike,” Mr. Bunn said.
But Ruth Mason, a professor of law and taxation at the University of Virginia School of Law, said no conclusive data shows corporations pass tax costs to suppliers or consumers.
“That’s an empirical question whether the cost is borne by the shareholders, the clients or labor,” Ms. Mason said. “There is a lot of discussion among economists about who bears the corporate tax, so the median position is that it is borne by the owners of capital, which is mostly the shareholders.”
A September study by Ernst & Young and the Texas Association of Business concluded that Texas could lose nearly 107,000 jobs if the minimum tax is imposed.
The study found that the tax would reduce payments to smaller suppliers of large multinationals, thus reducing employment. It would also lower wages and salaries for the multinational’s employees, thus reducing employment at restaurants, grocery stores and other businesses.
“The largest businesses have the best lawyers and accountants,” said Alexander Hendrie, director of tax policy at the conservative Americans for Tax Reform. “They will find a way to pass it along, whether it’s to consumers or small businesses. They are not going to eat this and move on.”
Another potential unintended consequence of the bill is blocking U.S companies’ entry into foreign markets because of the higher expense of doing business overseas.
Mr. Bunn said smaller U.S. businesses would be less competitive because they don’t have the resources to bear the costs.
“If you are a successful multinational company, you have the resources to navigate these rules, but it’s an extra layer of compliance to bury small business,” he said. “It turns smaller companies into acquisition targets rather than true competitors.”
When he returns to Washington, Mr. Biden will pitch the minimum tax to Congress. Proposed changes to some international tax treaties will have to go through the Senate.
Treasury Secretary Janet Yellen, who supports the global minimum tax, hinted that she might look for ways to bypass Congress. Still, any Treasury policy shift could be reversed on the first day of a Republican presidency.
Mr. Brady predicts lawmakers, including Democrats, will reject the global tax.
“We have no assurance other countries will deliver on their part of the agreement,” he said.