Foreign Affairs: The Global Minimum Tax Lives On, by Kimberly Clausing (UCLA; Google Scholar):
For decades, countries have attempted to attract multinational companies by lowering corporate taxes, and companies have responded by shifting reported profits toward low-tax jurisdictions. As a consequence, governments have lost hundreds of billions of dollars in revenue at the same time that multinational companies often pay single-digit tax rates. Although corporations and their shareholders have benefited from this race to the bottom, governments were left with no alternative but to shift tax burdens toward consumers and workers.
Last year, more than 135 countries signed an agreement to transform international taxation by requiring profitable companies to pay at least 15 percent in corporate tax, regardless of where they reported their profits. As Lawrence Summers, the former U.S. secretary of the Treasury Department, noted at the time, this political agreement represented “a triumph of Detroit over Davos”: leaders put their workers and citizens above shareholders, addressing a long-standing global collective-action problem.
Unfortunately, although U.S. leadership was pivotal in forging this agreement, U.S. lawmakers have come up short. Senator Joe Manchin, the West Virginia Democrat who has outsize influence in an evenly divided U.S. Senate, declared that moving first on the global minimum tax would be disadvantageous to U.S. companies, and it was not included in the Inflation Reduction Act. This means the United States will not be party to the agreement, since the agreement required all signatories to enact changes to their tax codes. The Inflation Reduction Act did include a corporate alternative minimum tax, but that should not be confused with adopting a global minimum tax: it does not tax the foreign income of U.S. multinational companies on a country-by-country basis, so companies will still have an incentive to operate in countries with rock-bottom tax rates.
All is not lost, however.
The agreement has an enforcement provision—“the undertaxed profits rule”—that provides a strong incentive for countries to implement the minimum tax. Simply put, countries that enact the agreement’s provisions will be able to tax multinational companies based in countries that do not adopt the provisions, but the resulting revenue will go to adopting governments, not nonadopting governments. This provides a strong incentive for countries—including the United States—to eventually follow through on their pledge to abide by the agreement. …
If the EU adopts the global tax, the United States would have a strong incentive to adopt it as well in years ahead, lest U.S. multinational companies face taxes abroad that do not benefit U.S. fiscal needs. If Hungary or other recalcitrant EU member states balk, even a handful of other countries could move forward. Canada, Japan, and the United Kingdom, for example, have large economies and a strong incentive to act on global tax. Once some countries take the lead, the undertaxed-profits rule will induce others to follow.
It would be tragic if instead the agreement withered away and the race to the bottom in corporate taxation continued. Although that may seem like a short-run victory for shareholders of profitable multinational companies, it would set the world on a dangerous path that would fuel both populist resentment and policy unilateralism. That could spark new conflicts among friendly countries, disrupt economic ties, and erode much-needed solidarity.
In such volatile times, there is hardly anything more important than building trust and shoring up multilateralism. The global minimum tax represents an opportunity to not just address decades of vexing international tax developments but also lay a foundation for international cooperation in other areas. With the United States stalled, it will be up to other governments to summon the courage to move forward.
