Save America from Yellen’s global treasure

Finance Minister Janet Yellen speaks at a news conference at the Treasury Department in Washington, DC, on April 21.


Ting Shen / Bloomberg News

Finance Minister Janet Yellen and her political allies are tireless in their efforts to get Congress to agree to a global tax deal, and their latest argument is that the pact will be good for US competitiveness. If only it were true.

This is an agreement last year in the Organization for Economic Co-operation and Development to raise centuries-old international tax principles. The first tip is a form of excess profit tax, which is primarily aimed at the largest U.S. technology companies, and which is to be applied to markets in which they operate, rather than where they are headquartered. The second is a minimum effective tax rate of 15% to be applied to the profits of global companies.

Ms. Yellen and the other backers of the plan say this will end a supposed “race to the bottom” over tax rates, though that race is mostly a fictional left-wing fantasy. Recently, they have added another argument: Implementing the OECD agreement will increase US competitiveness by reforming the US dysfunctional tax system while protecting companies from punishing foreign taxation if other countries implement the OECD plan and America does not.

If Mrs Yellen wants to reform US taxation of overseas profits, we can only say be our guest. For decades, the United States taxed the global profits of American companies, already an uncompetitive set-up, but did so in a way that provided incentives for companies to invest outside the United States instead of recouping their earnings. The 2017 law on tax breaks and jobs made important progress in reforming that mess, but there is still room for improvement in conditions such as the tax treatment of past losses.

But Ms. Yellen and Congress do not need foreign aid to solve these problems – and the OECD plan could put American companies at a global disadvantage. For example, the OECD offers more generous tax treatment of subsidies disguised as refundable tax deductions of the kind common in Europe, while cracking down on the form of non-refundable tax deductions more common in the United States

It illustrates how one point in the OECD plan is to prevent exactly the kind of tax policy experiments that could benefit the United States in the long run. Ms. Yellen’s solution to the tax credit problem is to pressure Congress to switch to refundable tax deductions in order to stay within OECD rules. Congress should defend its ability to impose the rules on credit or anything else it believes can benefit the U.S. economy.

When we talk about Congress, politics contradicts the claim that a global tax would be good for American companies. The Biden administration supports OECD efforts because the White House and the Treasury Department hope that a global minimum tax will provide political coverage for their own tax increases on corporate profits. But almost every time, the administration’s tax plans are worse than the OECD proposal, either by imposing a higher effective rate than 15% or offering fewer deductions and exemptions.

Ms. Yellen wants Congress to believe that this does not matter because she and her peers have accepted the OECD plan, so it is a done. Almost. Efforts to implement the OECD agreement in the EU have stalled, and no one knows how China or India will interpret the proposed rules when – or rather, if – these countries rewrite their tax legislation. Nothing would be worse for US competitiveness than Washington rushing to implement a “global” tax deal that is not global at all.

Competitiveness is what lawmakers should discuss when talking about tax law. But a global tax deal that is bad for America and not even global is the wrong way to do it.

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Published in print on May 9, 2022.

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