This article is from Full Stack Economics, a newsletter about the economy, technology, and public policy. You can click here to subscribe to the newsletter—it’s free.
At the end of October, more than 130 countries announced a landmark agreement to establish a global 15 percent minimum tax on corporate earnings. Until now, multinational corporations have routinely minimized their tax bills by shifting paper profits to tax havens like Ireland or Barbados. The deal brokered by the Organization for Economic Cooperation and Development, or OECD, aims to put a stop to the practice.
Democrats are rightly considering this a victory; stemming international corporate tax avoidance has long been a goal for them. “Secretary Yellen and the rest of my administration have rallied more than 130 countries,” read President Joe Biden’s official statement. Some liberals went further, proclaiming it a victory against Trumpism. The Washington Post’s Greg Sargent wrote that the deal “offers the promise of a real Democratic answer to one of Donald Trump’s ugliest legacies: Right wing populist nationalism.”
The Biden administration deserves credit for bringing this agreement to fruition. But, while you wouldn’t necessarily know it from much of the coverage, so do congressional Republicans and the Trump administration, both of whom quietly laid much of the groundwork for it.
It’s not just that the U.S. first began negotiating for a global minimum tax under Trump’s presidency (though it did). The final deal was also largely patterned on a key piece of the 2017 Tax Cuts and Jobs Act. This section, known as the rules for the taxation of “Global Intangible Low Tax Income”—GILTI for short—was discussed little outside the world of tax lawyers, accountants, and lobbyists at the time, but provided the whole world a useful new template for taxing slippery multinationals.
Donald Trump is not exactly the kind of person you would expect to help set the stage for a global center-left tax accord. But if you keep in mind the odd international politics of corporate taxation, and what Republicans were trying to achieve with their big tax bill, it might start to make more sense.
People generally see the United States as being to the right of Europe on economic issues, but that’s not true when it comes to taxing corporations. In the mid-2010s, while the U.S. corporate rate was 35 percent, European countries were exploring rates in the low 20s and teens. While the U.S. was still attempting to tax the worldwide profits of its firms, European countries had adopted territorial systems, where they did not attempt to tax activity beyond their borders.
Europe’s relatively right-wing approach to corporate taxes probably doesn’t reflect ideology. Rather, it’s a concession to the realities of tax competition. The U.S. is the dominant economy on its own continent, while Europe is more fragmented. This gives the U.S. greater leverage to levy high rates.
For example, if a firm gets 90 percent of its revenue from the U.S. and 10 percent from Canada, it is relatively easy for the IRS to assert that most of the firm’s income is U.S. income and to tax it accordingly. Not so in Europe, where a firm might operate across Belgium, France, the Netherlands, and Germany simultaneously, and have some ability to use internal transactions to locate on-paper income in the most favorable jurisdiction. Even if rules are airtight against on-paper shifting, real shifting—which is to say, actually moving your business—is a possibility: Rotterdam is just a couple hours’ drive away from Antwerp.
In short, it’s much easier for big companies to avoid individual European countries than to opt out of the massive American market. So if you’re a multinational corporation and the U.S. tells you to jump, you ask, “How high?” If you’re a multinational corporation and Portugal tells you to jump, you say, “a despedida” and book a one-way flight on Ryanair.
European countries have naturally responded to these incentives by lowering their corporate tax burdens individually; for example, the tax havens of Ireland, Liechtenstein, and Cyprus all had maintained statutory corporate income tax rates of just 12.5 percent in the late 2010s. However, Europeans also attempted to pursue a deal to stop the “race to the bottom” collectively.
Rather than adopting the more right-wing policies of European countries, Republicans acted in a relatively pragmatic way and took advantage of the U.S. federal government’s greater leverage to create a strong international tax system, mostly out of a need for revenue.
In fact, contrary to the liberal commentariat’s perception of the TCJA as a corporate tax giveaway and a tax hike on state and local tax-deducting individuals, the truth is much closer to the opposite.
The individual tax cuts were huge, on the back of a doubling of the standard deduction. They are slated to expire in 2025 because of the rules of the Senate reconciliation procedure, which dictate that bills cannot increase the deficit outside of the 10-year budget window.
Meanwhile, the corporate portion of the 2017 bill was permanent and close to revenue-neutral in the long run, enough that it was able to pass through the reconciliation procedure when coupled with a few other permanent provisions, like a change to inflation indexing.
This permanence was an explicit goal, and since permanence required revenue neutrality, the GOP pursued revenue neutrality. This shaped some domestic reforms, like aggressively limiting the deductibility of interest in order to recoup revenue lost from the statutory rate cut. And it also shaped international reforms like GILTI. “One of the reasons GILTI became what it was,” Tax Foundation’s Daniel Bunn told me, “is that there were enough people concerned about the price tag” of the Tax Cuts and Jobs Act.
Republicans started with a system that was begging for improvement. The U.S. had a high rate of 35 percent and, in theory, a “worldwide” system, meaning U.S. businesses were taxed even on their earnings in other countries. This was globally unusual and would have put U.S. businesses at a huge disadvantage—if they actually paid. But often they didn’t, because companies were allowed to defer that U.S. tax burden until the money was “brought home” for tax purposes. So naturally, they would defer “bringing the money home” for a very long time.
This distinction was a fake one. It is not like corporations deploy an armada of 17th century galleons to sail shipments of gold across the ocean. Bank accounts are effectively global and work pretty much instantaneously. Corporations can even cheaply borrow in the U.S. against cash reserves held elsewhere. But the distinction mattered for tax purposes, and it endured, not because it was principled but because eliminating it would put U.S. companies at too big of a disadvantage compared with rivals from other developed countries, which didn’t tax foreign earnings at all.
When Republicans set out to fix this mess in 2017, they looked for an approach that would raise as much revenue as the old system but do so more efficiently and sensibly. They found inspiration in a 2013 paper by tax analysts Harry Grubert and Rosanne Altshuler that provided the basic outlines for GILTI.
GILTI is a category of income for U.S. corporations, defined for the purposes of tax law. It is, roughly, the slippery type of income worldwide thought to be earned primarily by “intangible assets” like brands or intellectual property. If firms’ international taxes paid on GILTI are too low, then the U.S. adds extra taxes on that income, until a rate of about 13 percent is reached. And importantly, GILTI did not include deferral. This means tax is calculated immediately, and the distinction about “bringing money home” is gone.
GILTI immediately put a limit on the viability of tax-haven strategies, because countries could tax U.S. companies up to the GILTI rate without being undercut by a tax haven, since the companies would pay at least about 13 percent regardless of whether the jurisdiction they reported income in had a rate that high or not. The American Enterprise Institute’s Kyle Pomerleau walked me through this calculation, from the perspective of a country: “Now it’s no longer ‘do we tax this and potentially lose some economic activity?’ It’s ‘do we tax this and collect the money instead of the Americans taxing it?’ And that’s an easier question to answer.”
The problem with GILTI was mostly that other countries didn’t have it yet, and weren’t applying it to their companies. This would put U.S. companies at a disadvantage, and still leave an incentive for others to be a tax haven, if only for the advantages in dealing with non-U.S. business. Therefore, the global deal had to persuade other countries to adopt, essentially, their own version of GILTI.
Once the deal is fully adopted and implemented, a tax haven will not only find the U.S. adding additional tax to income reported there by U.S. corporations, but also the same from French or German corporations. This should make the enforcement more powerful.
There are some details that differ between the OECD approach and GILTI. For example, the rate is higher under the international deal, at 15 percent. The deductible expenses are also calculated differently. Perhaps the biggest of these differences is that the international deal requires a country-by-country calculation for the minimum tax. It’s not just that your worldwide tax rate has to be more than 15 percent overall on your worldwide income. It’s also that your tax rate in each individual country needs to be 15 percent. Grubert and Altshuler’s paper actually discuss both options; they argue the country-by-country version is more effective at punishing tax havens but also more complex to calculate.
Parties have an incentive to play up these differences. Republicans don’t like to tout their record as international center-left deal brokers, and Democrats don’t want to admit the Republicans did a good job, even as they try to replicate the rough outline of the Republican plan in more than 100 other countries. And there are some genuine differences on details. For example, Bunn, the Tax Foundation analyst, seems skeptical of the switch to country-by-country. He notes that the more income gets subdivided into different parts, the more likely it is for firms to have losses some years and gains in others. This creates a greater need for loss carryforward and carryback rules, which allow firms with unsteady profits to offset income from profitable years against the losses of unprofitable years. Furthermore, Bunn argues, more complex tax filing is a painful drag on medium-size businesses as they rise to challenge the global behemoths.
These differences are significant, but overall, the international tax agreement is fairly close to what Republicans already adopted in 2017, and it is likely to grandfather in the U.S. system under Trump and Biden, even if it is not identical to the base prescribed by the OECD agreement. When Treasury Secretary Janet Yellen last month expressed confidence that the U.S. would comply with the OECD agreement, the reason was simple: Her Republican predecessors had already done most of the heavy lifting for her.