Can Democrats Use Reconciliation to Enact a Global Minimum Tax?
Last week, 136 countries representing about 90 percent of the global economy agreed to a plan sponsored by the United States to enact a 15 percent global minimum tax on most businesses that operate internationally. The agreement does not, of course, have the force of law. Each of the 136 signatory nations would need to pass legislation to adopt the framework and make it apply to companies in their respective jurisdictions.
The Organization for Economic Cooperation and Development (OECD), which shepherded negotiations on the deal, wants countries to act rather quickly. Indeed, the agreement calls for countries that signed the agreement to sign a global minimum tax into law by 2022 and to have it take effect by 2023.
How likely is that to happen?
While getting 136 countries to agree to a global tax framework is a major accomplishment, it does not mean the proposal is universally popular. In fact, Switzerland already is grumbling and Ireland, which has a low corporate rate of just 12.5 percent, was a last-minute addition to the agreement. And, of course, there are U.S. politics with which to contend.
This road will not be easy. So, why now?
A Global Minimum Tax: Why Now?
The effort to enact an international tax floor has been in the works since before President Joe Biden even won the Democratic presidential nomination, but the Biden administration is very much on board with the idea. In a statement issued after the OECD deal was announced, President Biden said the world needs a global minimum tax because, “for decades, American workers and taxpayers have paid the price for a tax system that has rewarded multinational corporations for shipping jobs and profits overseas.”
Indeed, according to scholars at the University of Pennsylvania’s Wharton School of Business, companies shifting revenues and profits overseas has risen “dramatically” over the last several years. Specifically, the amount of “income in tax havens more than doubled from 2010 to 2018, from about $120 billion to $250 billion, while income in all other countries declined” and “the share of foreign profits attributed to tax havens rose from 25 to more than 40 percent.”
Additionally, according to an article published by The Atlantic Council, the worldwide average statutory corporate tax rate has fallen from around 40 percent in 1980 to approximately 24 percent last year.
Reuters summarized the overarching reason that countries are supporting the OECD plan: it would “put an end to decades of tax competition between governments to attract foreign investment.”
The OECD Global Minimum Tax Plan: What Is It?
Now, how would the OECD outline actually accomplish this? As Reuters and other media outlets have explained, the plan would implement a 15 percent tax floor that would apply to the overseas profits of multinational firms with $868 million or more in worldwide sales.
Individual national governments could still set their own, lower corporate tax rates if they wished, but if companies in their jurisdictions paid less than 15 percent by shifting income elsewhere or by any other means, their home governments would “top up” their tax bills so that the company’s overall tax rate would hit the 15 percent minimum.
The worldwide plan also would allow individual countries to tax companies’ “excess profits,” which are defined by the OECD as profits in excess of 10 percent of revenue.
It’s clear that the minimum tax could serve to increase additional tax revenues around the globe. Indeed, the Biden administration has said it hopes to use these revenues to finance the “Build Back Better” plan for human and physical infrastructure that Congress is now debating. On the other hand, according to an analysis by KPMG, a global minimum tax also could “result in tax revenues effectively being exported to other jurisdictions.”
There also is the broader economic impact to think of.
How Will A Global Minimum Tax Impact Americans?
While President Biden and Treasury Secretary Janet Yellen have argued reducing incentives for companies to shift profits overseas would result in businesses bringing jobs back to the United States, opponents argue the OECD’s plan could harm Americans in other ways.
A Fox Business article found, for example, that there “is some evidence to suggest that corporate taxes are ultimately borne by workers and consumers.” Specifically, an analysis by the nonpartisan Tax Foundation found up to 70 percent of the tax burden falls onto workers. The U.S. Chamber of Commerce (USCC) has said, “A global minimum tax is problematic for U.S. businesses because it would result in tax increases for them, which will force them to reduce investment. Less investment leads to fewer jobs and lower wages for American workers.”
Most business trade associations agree with the USCC and are skeptical of the OECD’s, but one sector has come out in favor of it: technology.
Because it will reduce the chance that the tech sector will be hit by other types of taxes. According to Axios, “Tech’s biggest reason to be enthusiastic about this tax: Countries that sign on to the scheme will also be required to back away from existing or planned ‘digital services’ taxes that take specific aim at tech revenue.”
With so much opposition from employers, does the OECD outline stand a chance?
Can A Global Minimum Tax Pass Congress?
According to the financial publication CFO Dive, the global minimum tax faces three primary obstacles in the United States. One issue is the fact that it conflicts with what the White House has said it actually wants. As CFO Dive explained, “President Biden has suggested a heavier tax on the foreign earnings of U.S. companies than the levies included in the new agreement.”
In other words, by supporting this plan, does the president risk contradicting himself or going back on campaign promises?
The second challenge is that the plan conflicts with current U.S. law. Under the 2017 Tax Cut And Jobs Act signed by former President Donald Trump, the United States already taxes the foreign earnings of U.S. companies at a minimum rate. That policy includes certain credits and provisions that would conflict with the OECD minimum rate, however. According to The Tax Foundation, if U.S. lawmakers were to change the U.S.’s current minimum rate “to resemble the global minimum tax proposal, this could increase the tax liabilities of U.S. multinationals by $106 billion relative to current law.”
Finally, there are the politics.
It’s possible the plan will need 67 votes to pass muster in the upper chamber of Congress. Why 67 and not just the usual 60 needed to overcome the filibuster? Because many legal experts believe that, given the OECD plan is global in nature, it must go through the same approval process as an international treaty.
As the U.S. Constitution makes clear, the Senate must ratify treaties with a two-thirds majority — 67 votes.
That’s why U.S. Treasury Secretary Janet Yellen is hoping Congress will approve the OECD framework as part of the budget reconciliation that congressional Democrats are working on now.
Of course, GOP senators are already making the argument that congressional leaders cannot do that. In a letter to Secretary Yellen, Sens. Mike Crapo (R-Idaho), James Risch (R-Idaho), and Pat Toomey (R-Pa.) argued, “Under the U.S. Constitution, a bilateral or multilateral tax treaty would require the advice and consent of the Senate, with a two-thirds vote of approval. The Senate Foreign Relations Committee, which has jurisdiction over treaty matters, has received no engagement from Treasury on this issue to date.”
According to Joseph Sullivan, who was a staff economist at the White House Council of Economic Advisers during the Trump administration, the Biden administration risks a political firestorm if it tries to push the deal through Congress on bare majority vote through reconciliation. In Foreign Policy, Sullivan wrote, “If the Biden administration were to sign an international treaty establishing a global minimum tax, that signature would be a partisan lightning rod much like the Iran nuclear deal, with little chance of passing in the U.S. Senate.”
Sullivan probably is right.
As we have explained before, key Democrats like Sen. Kyrsten Sinema (D-Ariz.) and Sen. Joe Manchin (D-W.Va.) already oppose the size of the $3.5 trillion “Build Back Better” legislation, and they are not all that happy with the tax policies that are in the bill now. Other Democrats oppose specific provisions within the bill, like the rules it would set for the pricing of prescription drugs.
The reconciliation bill already is on shaky ground. And adding the global minimum tax could make it shakier.