Economy & Business

Janet Yellen’s Global Tax Cartel

Former Federal Reserve Chair Janet Yellen holds a news conference in Washington, D.C. December 13, 2017. (Jonathan Ernst/Reuters)

It is often the case that the more oppressive a tax, the more oppressive the measures taken to ensure that it will be paid. Ask the Sheriff of Nottingham. It is no coincidence that the Biden administration’s proposals for a much more onerous corporate-tax regime include boosting the IRS budget to ensure tougher enforcement.

Increases in corporate tax are a bad idea at this difficult economic moment, but there is not much to be said for them at any time. Assume that the rate increases to 28 percent, as proposed. Add state and local taxes, and American corporations will be facing some of the highest rates of taxation in the world (and the highest in the OECD). Throw in various other proposals, including the introduction of a minimum tax on book income for larger companies (think of it, very broadly, as a sort of corporate Alternative Minimum Tax) and increases in the taxation of the global income of U.S. multinationals, and it is obvious that American companies are facing not only a substantial tax hike, but one that will put them at a serious disadvantage to their international competitors. Oppressive? Pretty much.

It is a measure of just how destructive these increased taxes are likely to be to U.S. business that Treasury secretary Janet Yellen has raised the idea of a global minimum tax. “We are,” she has said, “working with G20 nations to agree to a global minimum corporate tax rate that can stop the race to the bottom.” Put another way, what she wants is a global tax cartel. As antitrust enforcers eye Big Tech, the Biden administration talks up the virtues of competition, but when it comes to tax, different rules, it seems, apply. And, no, while countries compete on corporate taxation (and that’s a good thing), there has not been anything dramatic enough to qualify as a race to the bottom. Corporate-tax rates did decline sharply beginning in the 1980s, but, as the Tax Foundation points out, reductions in average corporate rates have plateaued for more than a decade. Far from being a race to the bottom, the 2017 tax cut still left U.S. companies (after taking account of state and local taxes) with rates above the OECD average.

Yellen’s proposal, which gets a nod in Biden’s infrastructure plan, is also more than a touch presumptuous. Taxation and sovereignty are inextricably intertwined. Different countries have different taxing and spending priorities; priorities, incidentally, that may change over time. The logic of why they should, at least to a degree, follow the prescriptions of the Biden administration may escape them. Quite a few will be irritated by what they may see as American bullying: Companies based in countries that do not go along with a global minimum tax may find that their U.S. subsidiaries are subjected to higher rates of taxation. That is not a way for America to win friends or, for that matter, investment.

It says a great deal that the idea of a global minimum tax has been welcomed by the EU Commission, and not only because of Brussels’s deeply engrained preference for harmonization over diversity. The EU’s more highly taxed countries (such as France and Germany) have long chafed at the competitive advantage that member states such as Ireland, as well as many in the poorer east, have derived from lower corporate-tax rates. However, it also says a lot that even the most tentative moves in the direction of a minimum EU corporate tax have gone nowhere.

If the EU, a relatively homogenous grouping, cannot agree on setting a minimum tax for its members, it is hardly likely to be in a position to accept Yellen’s global minimum tax. And if even the EU will not accept it, nor will anyone else of any consequence. Instead, America’s competitors will regard a major U.S. corporate-tax hike as a self-inflicted wound. And they will take the maximum possible advantage.


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