A (Rockier) Path Forward on International Corporate Tax Reform
While US lawmakers did not secure international tax reform in reconciliation, there are still paths towards implementing a global international tax deal with important fiscal and economic benefits for the US.By David Kamin and Chye-Ching Huang
It appears that lawmakers will move forward on reconciliation without addressing tax reform outside health care. This is a missed opportunity to address key structural weaknesses of the tax code when it comes to taxing the best-off and most sophisticated taxpayers.
And it raises immediate questions about the future of the international tax system after countries around the world agreed in concept to a new regime for taxing multinational corporations. Under that “Inclusive Framework” deal, more than 130 countries and jurisdictions, including the US, committed to modernize a century-old tax framework. If implemented, the deal would help reverse the race to the bottom on corporate taxes, and deliver substantial fiscal and economic benefits to the US.
Clearly, the failure of US lawmakers to quickly implement the US’s commitments is a blow to the prospects for real progress that would more effectively tax the largest corporations and work in the interests of most Americans — and others around the world. However, there is no option to freeze the world in its international tax status quo. The world prior to the international agreement was characterized not just by rules easily gamed by multinational corporations to shift profits to low tax jurisdictions, but also by countries increasingly taking their own unilateral actions to respond and the US threatening trade wars as a result. That is not an attractive alternative — and the fracturing of the old international tax system helped draw countries to the Inclusive Framework to begin with.
There is still a path for implementation of the Inclusive Framework deal, even if a rockier one. That is because the agreement was designed to be possible to implement even if a country like the US lags. The enforcement mechanism at the core of the agreement can successfully reduce the incentives for profit shifting — so long as a critical mass of countries implement the new tax framework and that enforcement mechanism, which the framework includes. That is because the enforcement mechanism allows the implementing countries to collect the revenue from companies based in other countries that pay less than the agreed upon 15 percent minimum rate if those countries fail to collect the revenue themselves. For this to work, countries with sufficient economic power — countries that multinationals cannot easily avoid doing business in — must adopt.
Indeed, there’s now a real prospect that our major trading partners will implement key elements of the Inclusive Framework deal before the US. Hungary, an authoritarian regime, is the lone hold up to European implementation. Hungary’s main goal appears to be to extract concessions on non-tax issues, but it has been taking cues from Republican lawmakers who appear to find it acceptable to coordinate with an authoritarian regime to undermine US economic and foreign policy aims. Nevertheless, other European Union (EU) members say they are resolved to find ways forward with or without Hungary, and the Biden Administration has moved to end the US tax treaty with Hungary to increase pressure on Hungary. Other major economies outside the EU could also move ahead on implementing the deal.
The structural fiscal and economic pressures that led countries to sign the Inclusive Framework deal push in the direction of implementing it. Like the US, other countries need to raise revenues to: sustain aging populations; address rising inequality; invest in families, workers, and innovation; and respond to crises such as Russia’s war against Ukraine, the pandemic, and the climate crisis.
If those countries do move ahead, then the global tax system would be fundamentally changed, even for companies not based in those countries. For example, take a major US corporation that pays less than the 15 percent minimum tax on its profits either in the US or elsewhere in the world. Even though the US would not be applying the minimum tax at the agreed upon international rate, implementing countries in Europe could deny deductions to the corporation through the agreement’s enforcement mechanism until that company paid sufficient tax under the minimum tax rules. This revenue would otherwise be collected by the US since it is a US corporation, but, in the absence of US action, it’d be collected by the implementing countries. The company could only avoid collection by not doing significant business in Europe and other implementing countries — an unlikely prospect for most major multinationals.
Undoubtedly, the US moving now would have significantly increased the chance of global adoption, given the size of the US market, and it would have reduced the chance of other countries collecting what should be US revenue. But the prospects for implementation do not entirely hinge on this legislative moment.
US lawmakers will be confronted with many opportunities to act on tax legislation in the coming years, as provisions of the “Tax Cuts and Jobs Act” (TCJA) expire or come into force, and as the nation continues to struggle to meet challenges with revenues far lower as a percentage of GDP than other rich nations. At the end of 2025, nearly all of the TCJA’s individual income tax provisions will expire, which is likely to prompt a major tax bill before then. And there could be earlier opportunities, as well, as Congress addresses provisions expiring before 2025 and discrete corporate tax increases triggering under the TCJA, among other events that could yield significant tax legislation.
The path forward to a sounder and more stable international tax system is, of course, longer and more difficult than the one that US lawmakers could have taken in reconciliation. Multinationals and their representatives can also be expected to continue to paint every bump and hill as an insurmountable end to the global deal in the hope that this will become a self-fulfilling prophecy. These hopes are shortsighted given the greater dangers that face countries and businesses in an environment where uncoordinated tax and trade wars would be more likely. History also suggests that we should not rush to declare every delay as the end of the road. The old global tax framework that emerged during the 1920s took hold even after a slow US start to implementation.
Lawmakers have missed a significant opportunity right now, but there is still a path to a more stable and fairer international tax system that works more in the interests of most Americans. That requires continued work and coordination with international partners, and US lawmakers not squandering their future chances to secure a modernized international tax system.
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