The high-tax lobby achieved—they think—their devoutly wished-for deal Friday when officials from 136 countries settled on new rules for taxing global corporations. Attention now shifts to national governments that are responsible for implementing this agreement, and the U.S. Congress especially should understand what it’s getting dragged into.
The contours of the deal follow earlier versions hashed out this year by Group of Seven finance ministers and then by roughly 130 governments via the Organization for Economic Cooperation and Development. The plan consists of two pillars. The first is a major overhaul to century-old rules for taxing large companies, aimed especially at tech firms. The second is a new global minimum corporate tax rate of 15%, which is supposed to limit tax-policy competition among governments.
An agreement is possible because the Biden Administration broke a longstanding bipartisan consensus in Washington that such a deal would be bad for American business. Democrats want to impose much higher U.S. taxes on American companies’ profits at home and abroad, and they think the pill will be easier to force down if lawmakers think other countries are following with tax increases of their own. Treasury Secretary
statement trumpeting the OECD deal included a plea for Congress to pass its tax increases “swiftly” now that a global pact is in place.
Before taking this bad advice, lawmakers might want to know how this global agreement made it over the finish line. Quick summary: Other governments locked in the lowest minimum-tax rate they could, and then tried to delay full implementation as long as possible.
Ireland is a case in point. The Celtic Tiger couldn’t withstand immense pressure from its neighbors and the U.S. to abandon its 12.5% corporate tax rate, and this week acceded to the OECD demand for 15%. But it insisted that rate be a cap rather than a floor. The OECD proposals over the summer spoke of a rate of “at least 15%” and, at Ireland’s (and Switzerland’s) behest, that “at least” is now gone.
Dublin also obtained a separate commitment that the European Union—of which Ireland is a member—will not expand its tax rules beyond the OECD deal when Brussels legislates to implement the global pact. This guarantees Dublin can keep its 12.5% tax rate for companies with annual revenue less than the OECD threshold of €750 million and prevents France and Germany from using the OECD deal as an excuse to raise European taxes.
The message from all this to Congress is that the rest of the world will not easily allow a global minimum-tax rate to drift upward to match an uncompetitive U.S. rate, no matter what Ms. Yellen hopes.
There were other changes to get a final deal. Switzerland insisted on more generous exemptions for payroll costs and fixed investment than were in the OECD’s initial proposal. Hungary demanded a longer phase-out for those exemptions (10 years not five), and Estonia signed on only after determining the deal wouldn’t raise taxes on Estonian companies.
Even after this haggling, countries participating in the OECD process are years away from implementing any of this. Once they sign off on final language for a pact, each of the 136 governments will have to revise its domestic tax law in line with the global deal. Don’t assume all of them will in the end. The tech tax that goes with it also requires changes to bilateral tax treaties that could take years to ratify.
Ms. Yellen and progressives hope the OECD global-tax gambit will provide political cover to impose much steeper taxes in the U.S. Now Capitol Hill is on notice: There is a limit to how much other governments will hobble their companies with higher taxes. Democrats want to raise taxes in the U.S. now, while foreign tax increases are years away.
The global tax project is bad policy that will reduce tax competition that has helped countries like Ireland attract more investment and grow faster. It serves the interests of the political class, not working people. But Congress shouldn’t compound the damage by making U.S. taxes even more burdensome than Ms. Yellen’s misguided global tax does.
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Appeared in the October 9, 2021, print edition.