The G-7 summit of the world’s largest economies was a display of big-government arrogance. In a blow to our form of government and independence, President Biden led a push to force all countries to increase taxes on income, foreign and domestic.
In a recent article co-written with four foreign counterparts, Secretary Yellen paid lip service to the principle that each government has the right to set its own tax policy. Yet the authors asserted that “exercising these sovereign rights together” to impose a global minimum tax would generate “a sustainable and inclusive recovery more effectively than if we stand alone.” What about countries with governments who disagree with Yellen that increasing taxes will improve productivity and economic growth? Not least a future U.S. president — or even the current Congress. An agreement by powerful countries and their allies to use “sovereign rights together” to effectively force dissenting countries to abandon a key element of their sovereignty looks a lot like imperialism to us.
Over the last several decades, countries have been steadily lowering their corporate-tax rates, spurring economic growth and expanding opportunity for workers. Some smaller countries, such as Ireland, have significantly lowered rates and dramatically boosted employment.
The U.S. Treasury is effectively ganging up with international bureaucrats and like-minded foreign governments to bully countries into increasing their taxes to a minimum rate of at least 15 percent. The administration apparently believes this would prevent its planned tax increases from causing an exodus of American companies and jobs.
But this theory doesn’t even meet its own premises, which are conceptually flawed and will in the end hurt consumers and workers.
In 2017, Congress changed the rules governing the taxation of the foreign profits of American companies. For U.S. companies that were most aggressive in trying to avoid tax by deferring their gains into the distant future, those rules imposed significant tax increases and gave the U.S. the world’s harshest regime for taxing income earned abroad. The Biden administration wants to go much further. In the absence of the international tax cartel that it seeks, this would put American companies and workers at a severe disadvantage.
The 15 percent headline goal does not reflect the full scope of the increase in the tax burden that the plan would require. In fact, it requires tax increases from virtually all countries, including the United States, not just countries with low rates like Ireland and Hungary. That is because the G-7’s 15 percent is actually a much higher super tax that would apply to a much broader income base and disallow some deductions and credits.
A minimum tax rate presupposes uniform rules for measuring taxable income, along with allowable preferences. The merits of many tax preferences are debatable, but the fact that countries come to heterogeneous conclusions indicates there is no a one-size-fits-all answer. The bureaucracy needed to sit in judgment over each country’s tax system would have to have breathtaking scope and power.
Revealingly, the one rule specified by the G-7 was that the 15 percent minimum must be on a “country-by-country” basis, meaning that every country must conjure a tax code that ensures that its companies, including foreign subsidiaries, are effectively subject to a tax rate of at least 15 percent in each and every foreign country, rather than just being subject to an overall rate of 15 percent or above. Given that some countries already have much higher rates, the overall tax rate would be much higher. The obsession with making sure each country imposes a sufficiently high tax on profits earned by its companies in every other country in which they or their subsidiaries operate betrays the reach of the proposed new scheme. A much more convincing policy would have countries generally impose zero tax on the foreign profits of their companies’ foreign subsidiaries, the very territorial system most countries currently have.
President Biden has proposed much higher taxes on all American companies than it is trying to force other countries to adopt only for very large companies. This means American workers will suffer from lost jobs and lower wages even if agreement is reached and implemented. And allowing other countries to tax American companies on the income they earn in the United States (assuming those foreign taxes would offset U.S. taxes) would transfer U.S. revenue to other countries, likely while raising prices on end consumers.
More fundamentally, the administration’s imperialist tax adventure is morally wrong and anti-democratic. The United States should not dictate tax hikes to other countries. Going back to the principles of the American Revolution and the Boston Tea Party, tax policy is one of the most important aspects of sovereignty. It should be decided locally, not by foreign governments and international bureaucracies unaccountable to those subject to the tax.
At home in the United States, attempting to permanently bind the government to high tax rates is profoundly anti-democratic. A future Congress has every right to decrease tax rates, no matter the policy preferences of this administration. Under our Constitution, the address for the Biden administration to change tax policy is Congress, not the OECD or an international tax police. Creating international laws and norms dictating each country’s tax laws is inherently illegitimate, as it rejects government by the people in each country. Congress should reject the call to do so.
Joshua Rauh is the Ormond Family professor of Finance at Stanford’s Graduate School of Business and a senior fellow at the Hoover Institution. Aharon Friedman is a director and senior tax counsel at the Federal Policy Group and formerly served as senior adviser and senior tax counsel at the Treasury Department and the Committee on Ways & Means.