Treasury Secretary Janet Yellen has a great idea: a global tax system. It provides for a minimum corporate income tax standardized in the industrialized countries and an expanded state authority to tax multinational companies. Coupled with the Biden administration’s plan to raise the U.S. corporate tax rate to 28% and eliminate preferences, the U.S. would revert to pre-2017 status as a high-tax jurisdiction and discourage domestic capital investment and production. It would be even more insidious if authority over taxation, one of the pillars of democratic governance, were ceded to a poorly defined international technocratic body or group of experts.
Such an erosion of sovereign democratic control should be evident. It has long shaped Europe and is part of the European Union’s drive to become a global regulatory superpower.
Ms. Yellen’s proposal stems from the longstanding efforts of major European nations to extend their tax power over US technology companies through what are known as digital taxes. Initiatives from France, Austria, Italy and the UK threatened to undermine efforts to harmonize corporate taxation in the EU and open a new front in a trade war with the US, as EU laws and opposition from Ireland and some northern Europeans unanimously approved In the Member States, European leaders have shifted the debate to the Organization for Economic Co-operation and Development (OECD), a group of 37 high-income countries, including the US
The initiative was quickly expanded to include a minimum corporate tax, another long-term EU target that could not be achieved internally or take effect internally if other developed countries did not participate. In this way, the European heads of state and government tried to reduce tax competition between EU member states and low-tax countries such as the USA, Switzerland, Singapore and Bermuda. Since Europe and most other developed countries are more reliant on sales taxes than corporate taxes, increasing these taxes would give their companies a cost advantage over US companies, especially since most sales taxes are reimbursed on exported products. US attempts over the years to gain such an export advantage have been hampered by World Trade Organization decisions.
The new Biden team is keen to work with Europe on bigger issues like the China challenge, climate change and World Trade Organization reform. Negotiating corporate taxes could help secure European cooperation while at the same time providing domestic cover for the tax increases that the Biden government needs to finance new spending.