Opinion | Yellen’s Global Tax Surrender


Treasury Secretary Janet Yellen speaks during a press conference at Winfield House in London, June 5.



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justin tallis/Agence France-Presse/Getty Images

Finance ministers from the world’s largest economies this weekend moved a step closer—they think—to new rules to tax large companies. Ignore the back-slapping about revenues and “fairness.” This deal is bad news for economies recovering from the pandemic, and especially the U.S.

The agreement concerns negotiations at the Organization for Economic Cooperation and Development for tax rules that would affect more than 130 countries. Finance chiefs from the G-7 economies, including Treasury Secretary

Janet Yellen,

say they’ve settled key sticking points.

One is that they want to implement a new method to tax global tech giants based on where the companies earn revenue rather than where they are headquartered. Another is a global minimum corporate tax, with a rate of “at least 15%.” The third is that the U.S. will participate, since President Biden and Ms. Yellen are the first U.S. leaders to believe this could possibly be in America’s interests.

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Problems abound, starting with the merits. Officials and progressive activists say they’re halting a global “race to the bottom” on corporate taxes. We’re glad they finally concede that tax rates matter to decisions about investment and job creation, since the left has denied this for decades. But the real action has been on tax policy competition, which has been instrumental to economic growth, innovation and job creation since the 1980s.

The OECD plan will throttle that competition. That’s because, while the G-7 agreement focuses on the headline rate for the new minimum tax, the OECD plan comes with reams of harmonized fine print on matters such as credits or exemptions for capital investment and research and development.

Suppressing tax competition is the main reason the Biden Administration broke with Washington’s long, bipartisan tradition of opposing a global minimum tax. Mr. Biden hopes to fund his domestic spending blowout by milking American companies for more revenue, and he’s figured out his tax increases will undermine American competitiveness unless other governments go along.

That strategy already is failing now that Ms. Yellen could secure agreement only to a 15% rate, rather than the 21% she first sought and would be closer to the Administration’s 28% tax proposal. Big-spending governments may bargain up the minimum rate over time, but it may take another global crisis or two before it hits the Biden level. American companies will be at a significant disadvantage until . . . other governments agree to hamstring their own firms.

Meanwhile, to get the minimum tax Ms. Yellen also had to agree to a digital tax aimed primarily at U.S. tech companies. The tech tax is a startling surrender for a Treasury Secretary. Ms. Yellen appears to have acquiesced to European demands that the tax be tailored so narrowly that it would apply primarily to U.S. digital companies and not large European manufacturers. In doing so, she’s surrendering Washington’s ability to tax American companies as Congress sees fit.

And for what benefit? The weekend’s agreement faces a tough road to implementation, if it ever gets there. Even if all 130 other countries agree, the tech tax requires revisions to a complex web of global tax treaties—and that means Senate ratification. Absent that, companies will have to grapple with a hodgepodge of foreign rules plus whatever parts of this project Treasury can impose by regulatory fiat. That’s hardly the simplicity and predictability that would be the best argument for this.

As for the minimum tax, expect a concerted effort to bludgeon lower-tax governments such as Ireland and Hungary into acquiescing. They and other European skeptics enjoy a veto on any plan since they could block the European Union from agreeing. They’ll perform a service to the global economy by holding out as long as they can, but the best they can manage may be to hold the line at 15%. That’s still well below the level of taxation the Biden plan wants for U.S. companies.

One country that almost certainly will not sign up for this is China. Beijing refuses to be drawn into these negotiations because it wants to retain control over its tax policy as a tool to encourage more investment. Chinese officials must be chuckling over their tea as they read the G-7 communiqué.

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The Biden Administration hopes these global tax rules will make it easier for American progressives to run rampant through the U.S. tax code without harming the economy. That hope is receding as the realities of the deal come into focus. American workers, consumers and shareholders will pay the price.

The global economy remains in a perilous spot as countries emerge from the pandemic. The officials directly responsible for leading that recovery have declared their attention is elsewhere. Rather than focusing on economic growth, they’ve struck a tax deal for the benefit of governments rather than the economy. Of all the policy surrenders this weekend, this is the most damaging.

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Appeared in the June 7, 2021, print edition.



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