Treasury Secretary Janet Yellen is working with other countries on an agreement that would establish a global minimum tax on multinational corporations in efforts to find new streams of revenue to help fund President Joe Biden’s future legislative actions.
If a deal is reached, the agreement could be one of Yellen’s biggest accomplishments in her Cabinet post, according to The Washington Post, and could be key to Biden’s term in the White House. The $1.9 trillion relief package that became law last week was financed through additional federal borrowing, which largely boosted the national deficit.
Yellen is participating in negotiations with the Organization for Economic Cooperation and Development (OECD) with more than 140 countries, with the intention to revise global tax rules to align with the digital economy. One goal is for countries to focus on a nonbinding global minimum tax.
But the Biden administration is already expected to implement tax hikes in its next major legislative package, such as the big-spending infrastructure and jobs bill currently in-the-works with Democrats.
On Biden’s presidential campaign trail, he proposed increasing the corporate tax rate from 21 percent to 28 percent, after former president Donald Trump sharply knocked it in 2017 from 35 percent to 21 percent.
Republican lawmakers and critics, however, have sounded the alarm over raising the rate, as it could interfere with U.S. competitiveness and trigger American countries to relocate overseas.
Several countries worldwide have recently followed the United States’ leadership in dropping tax rates, a movement that economists have dubbed a “race to the bottom.” On average, the tax rate stands at 24 percent among other countries, according to the Tax Foundation.
“It would be a mighty feat for Secretary Yellen to successfully cajole all our major trading partners to agree to a minimum corporate tax rate. It is both anti-competitive and not in self-interest of small, open economies to adopt a corporate tax system that discourages firms from doing business within their borders,” Alex Brill, a resident fellow at the American Enterprise Institute, said. “Taxes are necessary, of course, to all these countries, but why insist on a tax that broadly discourages business activity and investment?”
But other economists have noted that American companies were already actively looking to move overseas prior to Trump’s 2017 tax cuts due to the lower rates in other countries.
“Before the Tax Cut and Jobs Act of 2017, there was strong anecdotal evidence that American corporations were actively moving operations overseas to take advantage of lower tax rates compared to the US. So now that the Biden Administration is looking for additional revenue sources, including increased corporate tax rates, it certainly stands to reason that they want to pursue, via Secretary Yellen, international coordination to harmonize tax policies internationally,” Peter Ireland, an economics professor at Boston College, said.
Ireland added that rallying support from other countries, as well as from members of Congress, to support an OECD agreement will likely be a “challenge.”
“Getting other countries to sign on is going to be a challenge, in the same way that getting members of Congress to sign on will be tough, when many are naturally concerned about the adverse effects of higher taxes on companies in their own districts,” he said.
Any agreement made by the Biden administration under the OECD regarding tax policy would likely need to be approved by Congress, an issue that will certainly see hurdles in chambers with razor-thin margins.
“But this [is] always the big challenge when it comes to fiscal policy: tax cuts and spending increases are hugely popular, tax increases much less so. President Biden and Secretary Yellen need to work against the political dynamics that would otherwise lead to spiraling federal deficits. It's going to be hard, but they have to try,” Ireland said.
Yellen addressed the concerns about boosting corporate taxes by referring to the Treasury Department's efforts in negotiating with the OECD. She said during her confirmation hearing, “A global minimum tax could stop the destructive global race to the bottom on corporate taxation and help discourage harmful profit-shifting.”
“It’s necessary for U.S. companies to be globally competitive, and that’s why these OECD negotiations are so important,” Yellen added.
Rachel Bucchino is a reporter at the National Interest. Her work has appeared in The Washington Post, U.S. News & World Report and The Hill.