By Itai Grinberg, Assistant Assistant Secretary for Multilateral Taxation and Rebecca Kysar, Advisor to Assistant Secretary for Tax Policy
The President’s Made in America Tax Plan provides a framework to generate revenue, rebuild our infrastructure, and make vital investments in education, research, and clean energy, all of which help make the United States the best place in the world to do business stay . The plan would not only generate funds to fund a sustained increase in investment, but in a way that makes political sense. Importantly, it would fix a broken international tax system that rewards companies for outsourcing jobs and profits overseas.
Under current law, US multinational corporations are only required to pay a minimum tax of 10.5% on their overseas income, half the rate they pay on their domestic income, which gives them an incentive to operate overseas and shift profits . That rate is also far less than small businesses on Main Street – who generate all of their profits at home – or the tax rates for employees – who bear an increasing share of the tax burden as the burden on businesses falls.
The Made in America tax plan would increase the minimum tax on foreign corporate profits to 21% and reduce incentives for companies to move profits and jobs overseas. Such policies would bring justice to the working and middle classes not only through the programs they fund, but also by creating a level playing field so that jobs and investments can flourish in the United States. Under current law, companies have great tax incentives to move activities and profits abroad; a strong minimum tax can reduce this tax distortion and favor domestic activity and income.
Corporations have defended a lower rate on foreign income, arguing that their foreign competitors often pay 0% on their foreign income; in other words, they argue that US companies should pay less than American workers in the name of “competitiveness”. Regardless of how the US corporate rate has been over the past few decades, whether 35 percent (before 2017) or 21 percent since then, US companies have been the most profitable in the world, fueled by a large market, strong institutions, and a well-trained workforce. Future investments in climate protection, education, infrastructure and research and development – financed by these tax changes – will maintain this status and only strengthen the competitive position of US companies.
In addition, in a generational achievement, 134 countries, which account for more than 90% of global GDP, have agreed to reformulate international tax rules to introduce a global minimum tax on foreign corporate profits, thereby ending the race to the bottom, the starved Nations has caused the revenue. In the realm of tax competition, no country wins and workers and middle class people around the world lose.
Global decline in corporate tax rates
What is important is that the global minimum tax will act as a lower limit rather than an upper limit, thus allowing nations to adjust the exact tax rate to the needs of their respective country. The United States must and can act boldly here and lead with a minimum tax of 21% on the foreign profits of US corporations. With a global minimum tax on the horizon, US companies will be more competitive than ever as foreign companies face minimum tax rates almost worldwide. Importantly, the agreement contains enforcement provisions that encourage countries to join by imposing unfavorable tax treatment on companies based in recalcitrant countries. And by creating a level playing field, the global minimum tax agreement creates reliable income from which future generations will benefit.
Current global and US minimum rates for foreign corporate profits
As Congress begins finalizing its legislation, Secretary of State Yellen has urged members to remember the historic opportunity we have to end the race to the bottom. We can have a tax bill that works for the middle class as well as boosts the competitiveness of US-based multinationals. The introduction of a strong minimum tax of 21 percent is in the national interest and will also advance our international efforts to reduce tax competition.