By Nate Scherer, American Consumer Institute
As negotiations between Congress and the Biden Administration on the debt limit conclude, another heated debate over international tax policy is also unfolding. House lawmakers are increasingly concerned that the Biden Administration is not doing enough to negotiate a good deal for the United States regarding a new Organization for Economic Co-operation and Development (OECD) plan to reform the international tax system. Specifically, they believe the Department of the Treasury (USDT) has not adequately consulted with Congress about the OECD plan, which could undermine American sovereignty and harm American taxpayers. Congress has justification and should take appropriate action to safeguard American interests.
For decades, the international community has debated how best to reform the global tax system amidst accusations that large multinational enterprises (MNEs) are exploiting “gaps and mismatches between different countries’ tax system” to avoid paying high taxes. In 2021, 138 countries, including the U.S. under the Biden Administration, signed a new two-part tax deal designed to restore a “level playing field” and ensure that these companies pay their fair share. This tax deal would allegedly accomplish these objectives by establishing new model rules under what are collectively known as Pillars I and II or the Two-Pillar plan.
Pillar I would redistribute a portion of the world’s 100 largest companies’ taxable income, specifically that of tech companies like Facebook and Google, from where they are headquartered to where they sell goods and services. The idea is to expand the ability of countries to tax profits on corporations that sell products in their territories.
Pillar II would limit tax competition by implementing a series of new rules that enforce a global minimum tax rate of 15 percent on any business with more than $750 million in revenue. In practice, Pillar II would allow foreign countries to tax American MNEs if they pay less in another jurisdiction. Presently, countries with low tax rates attract more investment than high-tax countries.
There are numerous problems with the Two-Pillar plan. First, it represents a near abandonment of many of the pro-growth policies the OECD once promoted when established in 1961. Early on, the OECD advocated for free trade, removing “obstacles to the exchange of goods and services” and liberalizing capital movements. However, more recently, the OCED has abandoned many of these positions in favor of policies that raise member-state tax revenue and discourage competition.
This new agenda is incompatible with OCED’s early mission to “promote policies designed to achieve the highest sustainable economic growth.” It is also inconsistent with American interests.
The Two-Pillar proposal, and specifically Pillar I, would cede US taxing rights to foreign jurisdictions. Many of the world’s largest and most successful companies are American and cover many industries, including banking, technology, energy and others. For decades, these companies have served as a significant engine of economic growth for both the U.S. and nations abroad. Therefore, erecting a tax regime that singles them out for higher taxes is counterproductive and harmful to American interests. It undermines American competitiveness and hands new authority to tax American companies to international rivals. It also rewards high tax countries at the expense of developing countries in need of foreign investment.
In addition, a global minimum tax would increase operating costs for businesses, forcing them to raise prices on consumers, who already have enough to worry about without dealing with the unintended consequences of a new international tax agreement. Higher taxes have repeatedly been found to harm economic growth, lead to fewer jobs and reduce investment.
Many manufacturers are also rightly concerned that a new global minimum tax would negatively impact business incentives like R&D credits since these incentives may bring a company’s effective tax rate below the 15 percent minimum.
However, perhaps an even bigger issue than the Two-Pillar plan itself is the lack of information the Administration has given to Congress about the plan. Over the last two years, lawmakers have repeatedly sent letters to the USDT requesting more information on how the Two-Pillar plan would impact American tax revenue and businesses. Yet, many of these letters have gone unanswered.
The little information that the USDT has provided Congress is not reassuring. For instance, despite U.S. Secretary of the Treasury Janet Yellen falsely insisting that Pillar I would be “roughly revenue neutral,” she has also acknowledged that until details of the plan are finalized, “it’s not possible to come up with an estimate” of Pillar I’s impact on revenue. More recently, the USDT has also failed to respond to questions regarding cost estimates.
Congress has a right to know how the OECD’s Two-Pillar plan will impact American finances. Congress should not be afraid to exercise its constitutional budget authority and request an independent evaluation of the OECD’s plan. As suggested by the Cato Institute, Congress could request that the USDT and Congressional Budget Office (CBO) consult with the Joint Committee on Taxation to produce a complete review of the plan. If this report reveals that any part of the plan will negatively impact American interests, Congress should withhold financial support.
It is important to remember that the U.S. currently funds 19.1 percent of the OECD’s $236.6 billion budget. That is almost $80 billion per year and twice the amount that any other OECD member contributes. Therefore, Congress should not be afraid to withhold that funding if the OECD proves incapable of proposing a fair deal.
The OECD needs to return to the pro-growth policies of its founding. Demanding anything less unnecessarily cedes more U.S. autonomy over taxation to an international organization that doesn’t have America’s best interests at heart.
Nate Scherer is a policy analyst with the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit us on www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.