Lawrence Summers clearly views the G20 agreement on a group-wide minimum corporate tax a triumph judging by his Washington Post op-ed:
The leaders of the Group of 20 nations, representing the largest economies in the world, gathered Saturday to announce agreement on a deal that will create a more worker-centered global economy.
This agreement is arguably the most significant international economic pact of the 21st century so far. It is built around a profoundly important principle: Countries should cooperate to raise corporate taxation, not compete to reduce it. At a time of much cynicism about government, this agreement is a triumph of American leadership, for Treasury Secretary Janet L. Yellen and her colleagues. It also demonstrates the power of ideas to shape economic policy, as tax scholars have for years been pondering the conundrums of taxing global companies.
For too long, governments have been complicit in the light tax burdens of their companies, competing in a race to the bottom that has steadily lowered corporate tax rates. This competition to lighten tax burdens on mobile capital has occurred amid trends of rising inequality, rising corporate profits and a rising share of capital income (relative to labor income) in national income.
I’m afraid I can’t see it that way. Here’s a list of the corporate tax rates for the G20 countries. As I read it the agreement requires the United States to limit the applicability of deductions without requiring the other members of the group to do much of anything. Furthermore, since the Republic of Ireland, Luxembourg, various crown colonies, UAE, etc. aren’t members of the G20 it has no impact on them whatever. I expect the continued departure of corporate headquarters from the United States to restart with the attendant loss of jobs that entails. And that ignores that the tax itself is not efficient economically.
What caught my eye and what worries me is how he characterizes the agreement:
This new global minimum tax is a triumph of Detroit over Davos.
In 1950 Detroit was a city of almost 2 million people. Now it’s a third that size, a shell of its former self with many once prosperous neighborhoods in ruins. I’m afraid that he’s right.
A little color commentary on why Biden has been pursuing this.
The original Build Back Better proposal (a.k.a “social infrastructure”) had a price tag of 3.5-6 trillion and would be a partisan vote via reconciliation. A reconciliation is the bill has to be deficit-neutral; so they needed to raise money. One of the biggest revenue sources was to raise the corporate income rate to 28%. At 28%, the rate differential between the US and other jurisdictions was too high and would cause a giant whooshing sound as companies relocated to the EU/UK. To prevent that, the solution was to create a “global minimum tax” (originally Biden proposed 21%).
But due to pushback from Senate moderates (Sinema/Manchin), the corporate tax rate will not be changed. Also, slashing the price tag from 3.5-6 trillion to 1.75 trillion has cut the need for big revenue raisers from corporations. Pushback from Ireland and the Netherlands pushed the global minimum tax rate to 15% (not far from Ireland’s current 12.5%).
Its ironic the original impetus for global minimum tax has dissipated and the tax rate will end up barely any different from what it is today.
As a policy expert noted, with the way things are looking, Trump’s changes for corporations in the TCJA look pretty enduring now.
I’ve read (skimmed) somewhere that the biggest advancement was in reaching a consensus on where business activity takes place with respect to multinationals. The rate may not be as important as that the countries are not going to credit certain economic activity as occurring outside the country any more. If a multinational plants its IP in Ireland, and leases the IP to other subsidiaries, this economic activity is no longer given the same territorial weight.
I also think this is not a G20 plan, but was an OECD / G20 initiative. Pretty sure I saw a reference to Ireland agreeing to this, but I assume that as an EU member Ireland only has an independent foreign policy / trade policy at the EU’s sufferance.
As we saw with the Iran “deal”, executive-level agreements are good for, at most, 8 years.