Congress must ensure the U.S. remains competitive
Johnny Cash has a lesson for Secretary Janet Yellen's Treasury Department. In his classic rendition of Wayne Kemp's “One Piece at a Time,” Cash describes how a worker on a Detroit assembly line put together a rather novel automobile by taking car parts from the factory over many years. If Secretary Yellen isn't careful, a similar thing could happen to the U.S. tax base.
The administration's budget, released just last week, proposes nearly $5 trillion in tax increases, including more than half a trillion specifically for multinational companies.
One of these tax hikes is a new global minimum tax, agreed to by OECD countries in 2021. Even though economists have warned of the anticompetitive consequences of this global minimum tax agreement and Congress rejected such an approach last year, Yellen doubled down on her support of the tax in her testimony to the House Ways and Means Committee, saying that, in part, it will help fund the president's budget.
Revenue ambitions aside, Yellen seems determined to downplay what will happen to U.S. tax revenues when foreign countries begin to adopt the global minimum tax. She told the tax-writing committee that the U.S. is not ceding taxing rights. I strongly disagree. Through this tax, the administration is giving away the U.S. tax base in two ways.
First, the new global minimum tax rules take priority over the U.S.'s current rules for taxing the foreign profits of U.S. companies. One such rule, the tax on global intangible low-taxed income was put in place during the 2017 tax reform to ensure U.S. foreign profits were sufficiently taxed even if firms paid low taxes abroad. The international tax agreement would supersede rules like this, and a slice of the current U.S. tax base would fall into the hands of foreign governments.
Second, the secretary has given foreign governments the ability to tax parts of the U.S. tax base that Congress has explicitly chosen not to tax. It's no secret the corporate income tax system allows numerous credits and deductions that reduce tax revenue (often in an effort to spur investment and create jobs). Pundits call these “loopholes,” but we should really just call them “the law.” Regardless of one's opinion of these provisions, they were put in place by elected members of Congress and signed into law by various presidents.
Now, large companies that take advantage of Congress's incentives could get punished with higher taxes abroad. For example, say a U.S. company with a subsidiary in France claims a U.S. credit for research and development that puts them below the global minimum tax threshold. The French government would collect the difference. In other words, the global minimum tax would dull the U.S. government's tax incentives — to the benefit of foreign countries. (The administration proposes ways to address this problem, but it's a problem of their own design.)
At a virtual event in March, Thomas Barthold, the chief of staff for Congress' nonpartisan Joint Committee on Taxation, confirmed these views. As the global minimum tax collects more money, U.S. provisions (like GILTI and the Inflation Reduction Act's book income minimum tax) collect less — meaning less revenue for the U.S. The global minimum tax isn't just diminishing taxes put in place by Trump, it's undercutting those put into law by Biden, too.
Barthold also pointed to other potential effects this global tax will have on the U.S. tax base. The carve-outs for investment and payroll costs in the global minimum tax will play a role in the decisions that multinationals make regarding where to invest or hire employees, potentially hurting investment in the U.S. and decreasing employment.
Unless the administration and Congress get on the same page about U.S. competitiveness and who holds authority over the U.S. tax base (hint: it's Congress), then any new round of tax competition could favor foreign jurisdictions. American policymakers should focus on ensuring the U.S. remains an attractive destination for investment and employment by large companies.
If other countries increase taxes on the foreign income of U.S. companies and claw back U.S. credits for research and development, then soon those countries will have reassembled the U.S. tax base into a tax base of their own.
They'll get it one piece at a time, and it won't cost them a dime.