A Play on International Tax Policy, in Three Acts | And the moral of the tale is: The Senate’s contempt for international agreements can still backfire.
Act I: The Tax Cut and Jobs Act (TCJA), Washington, 2017
Trump: I did the best tax reform in the history of this country, okay?
Treasury Secretary Mnuchin: [To the audience] What the President is trying to say is that international tax policy is complex and involves a tradeoff between taxing US multinationals’ foreign profits, which harms their competitiveness on global markets, or not taxing them, which harms domestic businesses.
Prior to the TCJA the United States was an outlier as it taxed foreign profits, except for a giant loophole that made the policy a joke. The TCJA closes that loophole and adopts a middle-ground by taxing foreign profits at half the rate of domestic profits. We call that half-tax on foreign profits the “GILTI” because it targets corporate tax dodgers.
Didier Jacobs: Right. But the TCJA increased inequality and it’s better to tax foreign profits in full – without loopholes. The TCJA does not represent a comprehensive solution to tax dodging. When US multinationals abuse tax havens, it deprives not only the United States, but also poor nations across the world from much-needed resources for development.
Act II: The G20 and OECD’s global minimum tax
Scene 1: Paris, 2018
French Finance Minister Lemaire: This middle-of-the-road thing is not a bad idea. Let’s copy it. But let’s do it right. First of all, it must be an international agreement, otherwise multinationals will play one country against the other. It’s called the global race to the bottom in corporate tax: if one country does not offer tax breaks, multinationals threaten to move their operations to the next country.
Pascal Saint-Amans, head of tax at OECD (aka Organization for Economic Cooperation and Development): Certainement, Monsieur! My staff is going to develop a dandy 300+ page set of rules for a global minimum tax and invite countries across the world to negotiate it.
With this agreement, all big multinationals will have to pay a tax of at least 15% on the profits they make in every country where they operate. And the beautiful thing is: if a country decides to free ride by not adopting the agreement and continuing to offer tax breaks to multinationals below 15%, the countries that do adopt the agreement will step in and claw back those tax breaks through the global minimum tax. No more race to the bottom!
Scene 2: Washington, 2018
Treasury Secretary Mnuchin: [To the audience] You may be surprised that a Republican Administration accepted to start negotiating an international agreement to create something called “global,” “minimum,” and “tax.” But it is in the national interest of the United States: it would put US multinationals (which now pay tax on their foreign profits at half the rate of domestic profits) on a level playing field with foreign multinationals (which now hardly pay any tax on their foreign profits).
Scene 3: Rome, 2021
G20 (aka group of 20 most powerful national leaders in the world): We hereby endorse the global minimum tax! Now all countries are invited to translate it into their legislations. As soon as a critical mass of countries do so, it would be stupid for others not to follow because they would then let other countries tax their profits.
Didier Jacobs: Alas this global minimum tax ended up biased against poor nations; the 15% rate is too low; and can be lower still because of a tax break. But it is better than nothing for the world, and particularly good for the United States. it would put a floor under the race to the bottom, reduce tax havens abuse, protect American jobs, restore some fairness between domestic and multinational businesses, and raise tax revenues to deal with the food, energy, covid, climate and debt crises that the world now faces.
Act III: The reconciliation bill of 2022
Scene 1: Washington, 2021
Everybody in Washington: An international agreement? [Yawn] What’s the OECD, anyway?
Scene 2: The Build Back Better Act, United States House of Representatives, 2021
President Biden: Congress: The American people gave me the mandate to invest in American jobs and American families, fight climate change, and make the rich and big corporations pay their fair share. I therefore ask you to pass the Build Back Better Act that would accomplish all these things. […]
Because of the Senate’s Filibuster and reconciliation rules, we have only one shot at this: all these taxes and spending must be approved in a single package. […] And by the way, this Act includes a reform of the GILTI tax to align it with the global minimum tax agreement that does a better job at tackling tax havens and puts an end to the race to the bottom.
We are a great nation, so I have secured a special deal with our international partners: we don’t need to translate every single detail of the global minimum tax agreement into our legislation; we only need to make two major changes to the GILTI and we will be compliant, which guarantees that other nations will not tax our multinationals in our stead.
Every Ambassador in town: [Sotto voce] Yeah, the United States is a pain in the ass. Always demanding its separate set of rules. When Americans extoll the virtues of a “rules-based world order,” what it really means is that they want other nations to follow rules that they set, but that they don’t follow themselves. [Sigh]
Daniel Bunn at the Tax Foundation: But wait a minute: not adopting all details of the global deal means that foreign countries will be able to tax some pockets of US income after all. Awkward!
House Speaker Pelosi: All hands on deck! Let’s pass this bill.
Chorus of corporate lobbyists: All hands on deck! Governments around the world are ganging up to tax us more. We must kill this global minimum tax! This GILTI reform must be taken out of the bill. If the United States does not play ball, nor will the rest of the world.
Chairman of the Ways and Means Committee Neal: Sorry, my friends, but these GILTI changes are a redline of the President and represent the consensus of the Democratic Party. But I’ll sweeten the deal for you. The President wants to go above and beyond the global deal of 15%. I’ll make it no more than 15%. Yes, it’s a tax increase for you, but a small one. Just take it and cool off, my friends. I’ll shave some billions off the new spending on American jobs and families.
Speaker Pelosi: [Clunk – gavel sound] The House of Representatives adopts the Build Back Better Act. It now goes to the Senate.
Scene 3: The Inflation Reduction Act, United States Senate, 2022
Senate Majority Leader Schumer: [To the audience] It looks like we have forty-eight Senators on board. Not a single one of the 50 Republicans. We have to work on the two remaining Democrats to close the deal: Senators Sinema and Manchin.
Senator Sinema: Read my lips: no new taxes!
Senate Majority Leader Schumer: Come on!
Senator Sinema: OK, I could perhaps go for the corporate alternative minimum tax. That one is good politics.
Americans for Tax Fairness: You bet it is. Public opinion about raising taxes on the rich and big corporations has jumped – indeed, it is the policy polling best after fighting inflation. And few things are more aggravating than big corporations paying no taxes at all.
Every economist: The corporate alternative minimum tax may be good politics, but it’s no policy wonk’s favorite policy.
Senate Majority Leader Schumer: [To Senator Manchin] OK, and what about you, Joe? What do you think of the Build Back Better Act?
Senator Manchin: Let’s wait and see… blablabla… too much… blablabla… inflation… blablabla
[A few months later]
Senate Majority Leader Schumer: OK, what about it now, Joe?
Senator Manchin: Let’s wait and see… blablabla… too much… blablabla… inflation… blablabla
[A few months later]
Senate Majority Leader Schumer: We are running out of time. It’s now or never, Joe?!
Senator Manchin: OK let’s cut a deal.
Senate Majority Leader Schumer: Great! Childcare subsidies?
Senator Manchin: Off the table.
Senate Majority Leader Schumer: Child tax credit?
Senator Manchin: Out.
Senate Majority Leader Schumer: Billionaires Income Tax?
Senator Manchin: Nope.
Senate Majority Leader Schumer: Ending fossil fuel subsidies?
Senator Manchin: uh-uh.
Senate Majority Leader Schumer: And what about the GILTI changes?
Senator Manchin: Can’t do that.
Senate Majority Leader Schumer: But this is a special case. It’s part of an international agreement. Biden has fought hard for it. We must do it.
Senator Manchin: International agreement? That’s for little nations. We are exceptional!
Senate Majority Leader Schumer: You don’t understand. This is a particular international agreement with a built-in enforcement mechanism. If we don’t make our laws compliant with the global minimum tax, other countries will tax our multinationals in our stead.
Corporate lobbyist: [To Senator Manchin] Don’t listen to him. They won’t do it. It’s inconceivable that other nations would enforce an international agreement on the United States.
By the way, just last month the European Union failed to translate the agreement into their laws, thanks to a veto by Hungary. Besides, even if they did adopt the agreement, the Europeans would just agree to pretend that the GILTI is already compliant, even if it really isn’t. They are surrender monkeys. They always bow to American exceptionalism.
Czech Finance Minister Stanjura, chairing the EU Council of Ministers: [To the audience] The European Union remains committed to the global minimum tax. Negotiations with Hungary are ongoing in view of an agreement in October. If they fail, 26 out of the 27 European Union member-states can adopt the global minimum tax through another procedure.
Finance Minister Lemaire: Right: we’ll find any way to implement it.
Senator Manchin: [To Senator Schumer] Can’t do it. Hungary vetoed it at the European Union. If we implement the international agreement first and other nations don’t follow, our multinationals will be at a competitive disadvantage.
Didier Jacobs: [To the audience] Nonsense! Manchin has agreed to the corporate alternative minimum tax, which would also put US multinationals at a competitive disadvantage, but without any concession from our international partners in return. The whole point of the international agreement is to nudge our competitors to raise their taxes as well and acting unilaterally does the opposite. Besides, the competitiveness argument is overblown and misleading.
Senate Majority Leader Schumer: [To Senator Manchin] OK, we are out of time. So let’s take the GITLI changes out, but put the corporate alternative minimum tax in. It raises about the same revenue and after all we do need some revenue to fund the climate and health care spending that you do agree with. Plus we know that Sinema likes the corporate alternative minimum tax.
Chorus of corporate lobbyists: [To Senator Sinema] Senator, Senator, you are the finest member of this chamber and surely our very best friend. Please, please veto the corporate alternative minimum tax!
Senator Sinema: I have improved it. But sorry guys, I can’t block it entirely. The pitchforks are at the gate! We need that money to save the planet.
Vice-President Harris chairing the Senate and casting the tie-breaking vote: [Clunk – gavel sound] The Inflation Reduction Act is adopted.
House Speaker Pelosi: Everyone back from summer break! We must rubber-stamp what the Senate has kept from our Build Back Better Act.
President Biden: The Inflation Reduction Act is now the law of the land.
Scene 4: A corporate lobbyists’ party, K Street (Washington), 2022
Corporate lobbyist 1: The good news is that we killed the GILTI changes.
Corporate lobbyist 2: The bad news is that we couldn’t kill the pitchforks-at-the-gate version of international tax reform: the corporate alternative minimum tax. Our clients must now pay two minimum taxes: the TCJA’s GILTI on their foreign profits and the corporate alternative minimum tax on their global (domestic + foreign) profits.
Corporate lobbyist 3: The worse news is that our clients might end up paying three minimum taxes, because it is still possible that the rest of the world will go ahead with the global minimum tax and charge it to US multinationals. You see, those three taxes roughly aim at the same thing and look the same on the surface, but they are really distinct.
They were designed to stand alone and nobody has examined their interaction in detail. Compliance is going to be a nightmare – tax lawyers will make a killing. There is also going to be IRS audits and lawsuits. The uncertainty around the tax treatment of some projects will kill some investments.
Corporate lobbyist 1: And don’t forget foreign countries’ new digital taxes. The global minimum tax agreement was tied to another international tax agreement whereby foreign countries would renounce imposing new taxes on digital companies, most of which are American. It’s three international minimum taxes plus as many digital taxes as there are countries.
Corporate lobbyist 2: You mean, our clients end up with more taxes, more compliance costs, and more uncertainty? Sometimes I wonder why they pay us so much…
Corporate lobbyist 4: Don’t be a sissy. Knives out, guys. Our work is cut out for us: we must stop the European Union from charging the global minimum tax to US multinationals. Don’t forget: we are exceptional.
[Curtain]
Epilogue
Didier Jacobs’ monologue: The priority is to save the planet. The Inflation Reduction Act (IRA) makes an important step in that direction. It also includes welcome and long-overdue reforms in the health sector and more funding to the IRS to fight tax evasion. Those are three major legislative achievements.
The IRA’s failure to make the United States compliant with the global minimum tax agreement is nevertheless a big missed opportunity. If the Senate had adopted the House’s GILTI reform, it would have brought stability to international tax policy. The global minimum tax would have become the norm. Thanks to its enforcement mechanism, neither future Congresses nor foreign countries would have lowered their tax below it (but they can and should go above the minimum).
By contrast, the new international tax policy of the United States is unsustainable. Our tale’s corporate lobbyists are right that three minimum taxes add up to a mess. For multinationals, the end game is to kill both the corporate alternative minimum tax and the global minimum tax.
As to the corporate alternative minimum tax, multinationals lost this battle, but not the war. Congress has approved and repealed corporate alternative taxes before, and it is quite likely that Republicans will abrogate this corporate alternative minimum tax the next time they gain control of both Congress and the Presidency. But when will that be? Probably after corporations will have gone through all the administrative pains of complying with this new tax. And how sustainable will that be? Pitchforks will still be at the gates demanding that big corporations pay their fair share, and Democrats will be listening.
As to the global minimum tax, multinationals have won this battle, but not the war. True, many international agreements have died in the US Senate. But there is still more than an even chance that the global minimum tax survives because its self-enforcement mechanism makes it viable without US participation.
The European Union should ignore the United States and implement the global minimum tax. Once they receive a global minimum tax bill from Europe, US multinationals will come back to Congress and beg for the commonsense solution that everyone should have worked on from the beginning: do what the rest of the world does by translating the detailed global minimum tax agreement into US law and eliminating the redundant GILTI and corporate alternative minimum taxes.