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Yellen pushes for global minimum tax rate to create 'more level playing field'

However, “China will pay no attention to the OECD global minimum. Neither will Russia and many other countries,” one economist projected.
Janet Yellen holds a news conference after a two-day Federal Open Market Committee meeting in Washington, on Dec. 13, 2017.
Janet Yellen holds a news conference after a two-day Federal Open Market Committee meeting in Washington, on Dec. 13, 2017.Jonathan Ernst / Reuters file

Higher corporate taxes are a key part of paying for President Joe Biden’s $2 trillion infrastructure package. In order to keep American multinational companies from being at a competitive disadvantage, the administration is lobbying for other countries to commit to a tax floor.

In a speech to the Chicago Council on Global Affairs on Monday, Treasury Secretary Janet Yellen heralded a return to multilateralism after four years of diplomatic and economic isolationism. “America first must never mean America alone,” Yellen said.

“This is an area in which the United States is now trying to exercise some leadership,” said Eric Toder, institute fellow at the Urban-Brookings Tax Policy Center.

Yellen called on other nations to support the initiative, saying that the U.S. is working with other G20 nations to develop and implement a global minimum tax, which she said would “stop the race to the bottom” and foster more equitable economic growth among countries and regions.

“Together we can use a global minimum tax to make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations, and spurs innovation, growth and prosperity,” she said.

Biden’s plan calls for a corporate tax rate of 28 percent — effectively splitting the difference between the 21 percent rate signed into law in 2017 and the 35 percent it had been prior to the GOP tax cuts — and for doubling the current offshore tax rate of 10.5 percent.

The president dismissed the idea that raising corporate tax rates would hinder America’s economic recovery, telling reporters at the White House on Monday, “there’s no evidence of that.”

Policy observers say a global minimum tax would be a boon for Biden’s domestic corporate tax ambitions: If all companies — not just U.S.-based multinationals — were assessed the same tax rate no matter where in the world they booked their profits, corporate America would have little reason to establish figurehead offices in places with little business activity but low tax rates.

“Discussion of this just now also suggests they are concerned about capital flight if they raise corporate taxes for the infrastructure bill,” said Michael O. Moore, a professor of economics and international affairs at George Washington University.

“Business is multinational these days, and the idea of corporate residence has little economic meaning,” Toder said. Although it is a thorny question now for businesses ranging from social media platforms to drug manufacturers, the issue of locating or relocating a company for the purpose of tax avoidance has only arisen recently.

“The problem has gotten much much worse in the past 20 to 25 years. The nature of business has changed and become more global, and much more of the value-add is in intellectual property as opposed to factories,” Toder said. Computer code, chemical formulas and the like are portable assets in the way that cars or jet engines aren’t.

Secretary Yellen has the advantage of being well-known and highly regarded by her peers on the global economic stage, and her words carry weight, noted Tom Martin, senior portfolio manager at Globalt Investments. “By and large, Janet Yellen has an excellent reputation as a thoughtful and sophisticated global market player. It's hard to take away from the gravitas that she brings,” he said.

But even she will have a heavy lift coaxing a multinational consortium to agree in principal, let alone negotiating specifics like an actual global tax rate, which was not addressed on Monday. Achieving compliance could be a significant challenge, some said. “The incentives for a government to renege on such a promise of a minimum corporate tax will be overwhelming,” Moore said.

“Countries that decide to attract ‘desirable’ firms or activities will find a way around the global minimum with tax credits [or] special deductions,” said Gary Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics. “China will pay no attention to the OECD global minimum. Neither will Russia and many other countries.”

The administration is also likely to face resistance at home to any plans to generate revenue by raising corporate taxes, with Republican lawmakers already coming out in force against Biden’s proposal for funding his infrastructure plan.

In theory, an international tax with border-agnostic application would be an equalizer between companies — but it’s an open question whether or not chief executives will want to trade the certainty of a fixed tax rate for the opportunity to squeeze out more profits. “To the extent that it affects them all evenly, then it’s a nonevent from a competitive standpoint,” Martin said.

“If you tax only U.S. companies on their worldwide income, it really puts them at a disadvantage,” Toder said. “If Biden tries to put a tax on U.S. companies and other countries don't follow, that’s a recipe for failure.”