The decline in corporate taxation over the past few decades is generally attributed to pirate states like Luxembourg, Ireland, and Bermuda, which offer a tempting combination of very low tax rates and a shameless craze for companies to play bogus games.
But the pirates have a silent partner: the USA.
Generations of American politicians have shown little interest in raising money from corporations. Regarding corporate taxation as politically necessary but economically suspect, they have reacted to tax evasion with disapproving noises. They have allowed companies to pretend that profits are made in low-tax countries and then cited the loss of tax revenue as a justification for tax cuts. No wonder the United States receives a smaller share of corporate tax revenue than any other large economy.
The Biden government has come up with a plausible plan to break this pattern and get companies to pay more taxes by increasing domestic tax rates and penalizing companies that move profits to tax havens. It has won the support of other leading economies for an international minimum corporate tax rate. But a well-known obstacle, Congress, stands in the way.
The anti-tax radicals in the Republican Party oppose any plan to raise more money from corporations – even money that would otherwise be paid to foreign governments – and an international deal could require the support of two-thirds of the Senate. The Biden administration could accomplish many of its goals without a treaty by enacting amendments to US tax law. But there is also a lack of enthusiasm among some Senate Democrats. The rumble of discontent has already led the White House to cut its plans.
The basic reason for more corporate taxation is that the government needs the money. The government of Biden wants to build bridges, replace water pipes and increase the yield of renewable energies. Some economists argue that higher taxes will put a brake on economic growth, but the decade-long reduction in corporate taxes didn’t exactly produce the promised economic miracles. Even if there is a price, it can still be a sound policy to take money from the rich for the benefit of the many. The distribution of wealth also plays a role.
Work has to start at home. The focus on foreign tax havens has masked the extent to which the US has become a tax haven for US companies. The statutory tax rate is 21 percent. However, American multinational corporations only paid 7.8 percent of domestic profits in taxes in 2018, according to the Joint Tax Committee of Congress. While these companies also made generous use of foreign tax havens, the overall tax rate on their overseas profits was slightly higher than the tax rate on their domestic profits.
The Biden government has proposed raising the domestic tax rate to 28 percent and levying a tax rate of 21 percent on profits reported abroad.
It is also aiming for an international agreement on a minimum corporate tax rate of 15 percent. Companies would pay at least that much regardless of where they operated or claimed to be. Taxes paid abroad would be credited to them, but if they paid less than 15 percent of the profit, the home country would collect the difference.
Such a deal would limit the competitive disadvantage of American companies. Treasury Secretary Janet Yellen, who leads the negotiations, argues that this would also benefit the global economy by ending tax wars and encouraging countries to compete by instead training workers and investing in infrastructure.
Some pirate states, particularly Ireland, have protested loudly, arguing that they use low tax rates to promote legitimate economic development. For Ireland this is a half-truth. For even smaller tax havens this is pure nonsense. Companies that make profits on the Isle of Jersey play the same game as freighters that fly the Liberian flag.
According to the Organization for Economic Co-operation and Development, multinational corporations book around 25 percent of their profits in tax havens, where they dispose of an average of 11 percent of their assets and 5 percent of their employees.
Ireland’s position is understandable but unacceptable and ultimately not a major obstacle. If the major economies agree to adopt the American system, Ireland can continue to pretend it is a major center of business activity, but businesses will still have to pay their bills at home. Ireland would lose most of its usefulness as a tax haven.
The US wants a deal for another reason too. Countries have generally tried to limit tax disputes by agreeing that companies should pay taxes in the countries where they create value. But that principle has been weighed down by the rise of American tech companies like Facebook and Google, which make money in countries where they have little or no physical footprint. European countries want to tax these companies and argue that, for example, Google not only provides its users in France with a service, but also receives valuable information from French users. As part of the broader agreement, the United States is offering to let these countries tax some of the tech companies’ profits in order to lower the new taxes.
The excitement about the prospect of an international agreement should be absorbed with a grain of history. Just a few decades ago, the average corporate tax rate in industrialized countries was almost 50 percent. Corporations and anti-tax ideologues have used globalization to bring about change that is likely to last for the foreseeable future. A minimum tax rate of 15 percent would simply hold their progress back. But this is how change begins: You stop, turn around and then you go in the other direction.