“It would be a ‘big fucking deal.’’’
I had asked Gabriel Zucman, the influential University of California, Berkeley economist, to weigh in on the Biden administration’s plan for transforming how the whole world taxes large multinational companies, which so far has flown a bit under the radar compared to other parts of its agenda. The White House has promised to pay for its $2 trillion American Rescue Plan by raising taxes on behemoths like Apple and Google while ending what it calls the international “race to the bottom”—the decades-long spiral of beggar-thy-neighbor competition, in which countries have courted business investment by slashing their corporate rates lower and lower. The administration’s strategy involves convincing other developed countries to adopt a global minimum tax for corporations, while reshaping the United States’ own tax code to stamp out the advantages companies currently get from booking their earnings in tax havens.
In other words, the administration is vowing to fund a historically ambitious infrastructure and economic modernization plan in part by solving one of the thorniest problems created by global capitalism. As his use of everyone’s favorite Bidenism would suggest, Zucman is pretty stoked about the whole idea. “If implemented, such an international agreement would lead to a collapse of the development model of tax havens,” he wrote to me. “A high global minimum tax can change the face of globalization.”
Zucman’s response isn’t exactly a surprise, since the administration is essentially singing his own tune on this issue. The 34-year-old is known for his work on wealth inequality and his dogged efforts to track how businesses and the rich use tax havens to their advantage. Biden’s plan leans heavily on proposals Zucman has promoted in work with fellow Berkeleyite Emmanuel Saez and former UCLA economist Kimberly Clausing, a widely respected authority on corporate tax issues now at the Treasury Department, where she is one of the key figures leading the administration’s push. It’s one more example of how Bidenworld has somewhat unexpectedly embraced personnel and policies from the progressive cutting edge—and then sold them as a simple matter of fairness.
Now about that race to the bottom. Between 1985 and 2020, The average corporate tax rate across major economies fell from 49 percent to about 23 percent as countries tried to spur more investment at home and make themselves more appealing destinations for big multinationals looking for lighter levies. Tax havens like Bermuda, the Cayman Islands, Ireland, the Netherlands, and Switzerland have led this downhill stampede by cutting their corporate rates to the bone or by offering massive incentives that let companies slash their tax bills. Using creative accounting techniques with names like “a double Irish with a Dutch sandwich,” businesses have been able book their profits in these jurisdictions without necessarily doing much actual business in them, often keeping a modest office footprint, or less. This situation has been excellent for corporate shareholders, but less so for governments struggling to raise revenue.
When the Trump administration cut the top U.S. corporate rate from 35 percent to 21 percent in 2017, it imposed a few measures meant to discourage tax-haven abuse. They included a somewhat weak minimum tax on overseas profits known as the GILTI, which was designed to eventually max out at about 13 percent, and was mostly aimed at profits from intellectual property. The results haven’t been impressive so far. In 2019, U.S. multinationals still booked 61 percent of their post-tax profits in the seven biggest tax havens, according to a paper by Clausing, essentially unchanged from past years. She predicted that number would fall a bit in the future as companies adjusted to the new rules, but not dramatically.
The Biden approach is vastly more aggressive, and uses America’s enormous economic sway to force global change.
Part of the effort is diplomatic. For years now, there have been ongoing discussions at the Organisation for Economic Co-Operation and Development—the club of developed countries—about establishing a global minimum tax on corporate profits. Officials have been hoping to wrap up negotiations this year, and recently Treasury Secretary Janet Yellen has called on the group to establish a 21 percent minimum rate. Previously, the talks had focused on a much lower number, perhaps 12.5 percent (not coincidentally, that’s Ireland’s corporate rate). The Biden team is essentially urging America’s peers to go big in the agreement.
If other countries are hesitant, the White House has essentially signaled it will use America’s own tax code to nudge them along. The plan the president has proposed would raise America’s tax rate on domestic corporate profits to 28 percent. At the same time, it would require our companies to pay at least a 21 percent rate on their overseas earnings once foreign and U.S. taxes are combined. So if a tech giant paid a 12.5 percent tax on its Irish profits, it would have to fork over another 8.5 percent to the U.S. If it paid a 17 percent tax in Singapore, it would owe another 4 percent to Uncle Sam.
Crucially, companies would have to calculate and pay the minimum tax on profits separately for each nation where they do business. This country-by-country approach, which Clausing and Zucman championed together, is designed to wipe out the incentive for U.S. multinationals to book any profits in tax havens, since they would owe at least 21 percent on money earned anywhere in the world.
At the same time, the Biden plan would penalize companies that are based in ultra-low tax countries by denying their U.S. operations important deductions. (The provision has been given the Marvelesque acronym SHIELD). By promising to wage its own unilateral war on tax havens, the U.S. is hoping it can enlist other rich nations to join the effort, solving the collective-action problem that has spurred the race to the bottom.
One reason to be optimistic about this plan is that the United States does not need every country in the world to go along with its idea for a global minimum tax to be effected. As Zucman and Clausing have pointed out, just 10 countries are home to the companies that generate about 80 percent of profits from multinationals. If only handful followed the U.S.’s lead, it would make a major difference.
But pulling this off could be politically challenging, both diplomatically and in Congress. It’s not clear if other rich countries will get on board with Yellen’s call for a 21 percent minimum; European officials have said some generically positive things about the Biden administration’s stance, but not much about the number itself. “It’s hard to see the OECD going along with what the U.S. has proposed,” Alan Auerbach, a Berkeley tax economist known for his more moderate streak, told me. “I view this as the first step in a negotiation with other countries.” And if Biden can’t get other countries to go along, some members Congress might get nervous about putting U.S. companies at a disadvantage by taxing their global profits compared to their foreign competitors. The Biden plan includes some strong provisions aimed at stopping corporate inversions, where companies use mergers to self-deport abroad for tax purposes. But the old fears about scaring away investment might return. Senate Democrats have put forward a corporate tax plan that embraces some of Biden’s ideas, but is less stringent in some respects.
And the fight will only get more intense. The Chamber of Commerce has already begun lambasting Biden’s plan—“This plan would make America less competitive, which would mean less U.S. economic growth”—and corporate executives have started grumbling to the press, though not always on the record. As one put it to Politico, “jobs will go if we do this stuff.”
Of course, that kind of logic is how we got the race to the bottom in the first place. The world seems overdue for a fresh approach.
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