Yellen’s International Tax Scheme Would Punish America

National Review Online

Friday, June 11, 2021

 

Janet Yellen celebrated a recent G7 tax agreement as a win for “the middle class and working people in the U.S.” In reality, the scheme to establish a minimum global corporate-tax rate would transfer revenues from the U.S. treasury to foreign governments while putting American businesses at a disadvantage in international markets.

 

At the heart of the current drive for a global tax system is the fact that President Biden is pushing $4 trillion worth of spending plans at a time of record debt. Because suburbanites are now a core part of the Democratic coalition, there could be severe political ramifications to forcing the upper middle class to pay for too much of his agenda. The lowest-hanging fruit from a revenue and political standpoint is to hike corporate taxes. But Yellen recognizes that, under the current system, raising corporate-tax rates risks making the U.S. uncompetitive. Thus, she’s determined to create some sort of global corporate-tax system to reduce the incentive for multinational companies to seek out lower-tax jurisdictions.

 

Unable to foster innovation domestically, Western European governments have spent the past two years devising “digital services taxes” (DSTs) on foreign technology firms. A report from the Trump administration’s U.S. Trade Representative found that such taxes discriminated against U.S. companies and contravened prevailing tax principles. By targeting only the largest multinational tech firms (i.e., American companies), France, the U.K., and others were attempting to protect domestic laggards from American competition.

 

OECD discussions on international taxes, which set the stage for this weekend’s G7 summit, began under the Trump administration with the goal of replacing DSTs with a more efficient tax regime.

 

The deal championed by Yellen, however, does just the opposite. The “equitable solution on the allocation of taxing rights” gives member nations the right to tax the largest and most profitable multinational enterprises irrespective of whether those corporations have physical presences in their countries. Unsurprisingly, American businesses will bear the vast brunt of the new tax. Proponents cast it as an adaptation to a digitized economy, but if that’s that case, why not apply the tax to all digital businesses, rather than only the largest? Because the finance ministers said so.

 

Talks intended to do away with arbitrary tariffs have codified them. Then there are the distortions created by this scheme. Because the policy applies to profits over a 10 percent–margin threshold, businesses are incentivized to shift costs arbitrarily. If, say, Google makes $15 for every $100 of revenue generated in France, it pays the tax; if, on the other hand, it makes $9 for every $100, it doesn’t. Under this regime, the company might save money by putting up a costly datacenter in Paris, at the expense of its customers, shareholders, and the U.S. economy. And what to do about Amazon, whose ecommerce segment produces razor-thin profit margins but whose web-services segment is among the most profitable in the world? Don’t be surprised if tax authorities target individual business units within larger corporations.

 

The reward for this transfer of tax dollars out of the U.S.? A global minimum corporate-tax rate of 15 percent. This provision is largely symbolic, because all but a handful of OECD countries already levy taxes above 15 percent. But the global minimum provides cover to the White House as it pushes a proposal to increase U.S. corporate taxes from 21 to 28 percent. With the thorny issue of enforcement tabled, the global minimum is unlikely to move the needle on the effective tax rates of corporations, even in low-tax jurisdictions, but Biden is betting that it will make his tax plan more palatable to moderates in Congress.

 

Fortunately, the passage of international treaties requires a two-thirds majority in the Senate, and Senate Republicans are loath to enter an international agreement so clearly designed to fuel a federal spending binge. Hamilton said of treaty-making that it “would be utterly unsafe and improper to intrust that power to an elective magistrate of four years’ duration.” That still holds true, as the Senate would do well to remember.