The editors of the Wall Street Journal write about an aspect of the 2017 tax reform of which I was unaware and which the Biden Administration wants to curtail:
We’re talking about the tax on global intangible low-tax income, known as Gilti, which was created by the 2017 tax reform. American multinationals were previously charged the full U.S. corporate tax rate on their global profits, but only when they repatriated their foreign earnings. That created a strong incentive to park foreign profits overseas. Gilti taxes many foreign profits as they arise, but at half the top domestic rate. That less punitive approach allowed more companies to return overseas cash to the U.S.
Gilti was flawed from the start and needs fine-tuning, but Mr. Biden would make it worse in every respect. Start with the rate. The 2017 tax law set the statutory Gilti rate at half the regular corporate rate, so Gilti now is 10.5%. Mr. Biden would increase that to 21%, three-quarters of the 28% rate he proposes for companies overall.
That’s the statutory rate, though, and the effective rate companies actually pay is higher. This is because Gilti embedded double taxation in the tax code. Before the 2017 reform, companies could claim a credit of 100% of foreign tax paid against their U.S. tax bill, and also could carry losses forward or back. Gilti allows a credit of only 80% of foreign taxes, with no carry-forwards or carry-backs.
This means today’s effective Gilti rate is at least 13.125%, so any U.S. company paying less than that percentage of profits in foreign taxes will owe Treasury a Gilti payment. Raising the statutory rate to 21% increases that effective rate to 26.25%. This new Biden effective minimum tax would be higher than the statutory tax rates in most countries even in Western Europe, and that’s before those countries apply deductions and exemptions.
Reforms to the corporate income tax will also test the Biden Administration’s commitment to international institutions and accords:
The OECD’s current discussions for a global minimum tax involve a lower statutory rate than the new Biden Gilti, probably around 12%, though it hasn’t published a number. The OECD is trying to find ways to allow companies to carry losses forward or backward to smooth out tax liabilities over time. And the OECD would offer a more generous investment exemption by also exempting part of the profits attributable to foreign payroll, a carve-out not included in current Gilti that would benefit service companies with fewer tangible assets.
This doesn’t make the OECD plan a good idea. But it shows that even in Europe there are limits to how much governments are willing to harm their companies to stifle low-tax competition from the likes of Ireland.
Corporate income taxes are an area in which the Democratic Party has painted itself into a corner. Their reliable talking point of the terrible injustice of low corporate income tax rates and the need to raise them in the name of justice is precisely backwards. Business income taxes should be abolished on many grounds including on the grounds of justice. Taxing the same income multiple times is itself unjust. Furthermore, as I have documented in the past, business income taxes are inefficient. Not only do they induce companies to do things they wouldn’t do in the absence of the tax and pay substantial sums to avoid the tax, they also pass both the tax and the cost of tax avoidance along to their customers. That is, in effect, a regressive tax, falling most heavily on the poor.