June 22, 2023
June 22, 2023
No matter what other countries do, the U.S. would be better off if it implements the international agreement to impose a global minimum tax on corporations. That is the conclusion of a recent report from Congress’ official revenue-estimators at the Joint Committee on Taxation (JCT). But you would never know that from the way some lawmakers are selectively citing the JCT report to defend corporate tax avoidance.
Even worse, these lawmakers ignore proposals from President Biden and Congressional Democrats that are stronger than the standards set out in the international agreement and would therefore raise more revenue than any scenario explored in this JCT report.
There is overwhelming evidence that this type of reform is badly needed. For example, American corporations, as a group, reported to the IRS that they earned $60 billion in the Cayman Islands in 2019. This is impossible, because the entire economic output of that tiny nation was just $6 billion that year. Similarly, American corporations reported that they earned $31 billion in Bermuda, even though that country’s economic output was just $7 billion.
American corporations are obviously using accounting gimmicks to claim that profits actually earned in the United States (or other countries with functioning tax systems) are earned in countries where they will not be taxed.
Corporate behemoths like Apple and Nike set up offshore subsidiaries that are really just PO boxes in tiny tax havens like Bermuda, claim that these PO boxes earn a huge portion of their profits, and often then route the profits through a country like Ireland or the Netherlands that have long looked away from this chicanery.
To address this problem, the Biden administration negotiated an international agreement with the OECD and other nations to impose a minimum tax of 15 percent on corporate profits that would wipe out most of the benefits that corporations obtain when they claim that profits are earned in tax havens. (This is distinct from a different type of minimum tax that Congress recently enacted and which, confusingly, also has a rate of 15 percent.) Most governments have signed on.
Some of the tax havens are tiny countries largely at the mercy of economic forces and powerful governments in London and Washington. The good news is that they have signed on to the agreement as well.
But the U.S. cannot implement the global minimum tax until Congress enacts legislation to do so. Republicans who control the House of Representatives have refused. And now they are citing the new JCT report which they claim, erroneously, supports their position.
President Biden has proposed that Congress enact rules for U.S. corporations and corporations operating in the U.S. that are even stronger than required under the international agreement. For example, the President’s proposals would tax offshore profits at a minimum rate of 21 percent rather than the 15 percent required under the international agreement.
Similarly, the No Tax Breaks for Outsourcing Act introduced by a group of Democrats in Congress would also require that offshore profits of American corporations are taxed at a rate of at least 21 percent.
But JCT was told to analyze what would happen under various scenarios involving the implementation of the international agreement, not the Democratic proposals that would be even more effective.
The JCT report starts by honestly noting it doesn’t know how the international agreement to shut down offshore tax dodging will affect U.S. revenue.
The report first considers how U.S. revenue will be affected if the 50 countries now moving to implement the agreement go ahead with it. Because no one knows what will happen, JCT is forced to make assumptions.
Under one assumption U.S. corporations will undo the accounting gimmicks that make many of their profits appear to be earned in offshore tax havens, so that they are reported (more accurately) as U.S. profits. So, JCT considers a scenario in which U.S. corporations respond by effectively shifting three-fourths of their offshore profits in tax havens back to the U.S. In that case, U.S. revenue will rise by $224.2 billion over the next decade.
Under a different assumption American corporations will report these tax haven profits not in the U.S. but in other countries where they really are doing business. JCT therefore considers a scenario in which American corporations respond by shifting three-fourths of their offshore profits in tax havens to other countries rather than the U.S. In that case, our revenue will fall by $174.5 over the next decade.
Why would U.S. revenue fall? JCT reasons that currently the U.S. at least taxes some of those tax haven profits under our weak anti-tax-avoidance rules. But if most of these profits shift to other countries that really tax them then we will no longer collect that revenue.
No one knows exactly what will happen, so JCT assumes the answer is in the middle, which is all it can do.
Then JCT asks, assuming that is happening, what is the additional effect of the U.S. implementing the international agreement, the rest of the countries implementing the agreement, or both?
Remember, at this point, JCT has already assumed that about 50 countries are implementing the international agreement. That is baked into the baseline against which they compare other scenarios.
One possibility is that the rest of the world’s countries do nothing to implement the international agreement. This situation might be somewhat plausible, at least in the short run, because the countries that are most enthusiastic about this are already moving forward.
In this scenario, U.S. revenue will rise by $236.5 billion over the decade if the U.S. implements the agreement (or by $102.6 billion if the U.S. implements only the core parts of it).
Another possibility is that the rest of the world’s countries implement the agreement (in addition to the 50 that JCT assumes will go ahead with it). It is unclear whether this could really happen, particularly if Congressional Republicans achieve their goal of preventing the U.S., the world’s largest economy, from enacting it.
Under this scenario, because some tax haven profits that the U.S. currently taxes (weakly) would be shifted to other countries, U.S. revenue would fall.
But it would fall much more if the U.S. refuses to implement the agreement compared to what would happen if the U.S. does implement the agreement ($122.0 billion vs. $56.5 billion).
And again, the relevant proposals from President Biden and Congressional Democrats would not just implement the agreement but would be much stronger, subjecting offshore profits to higher rates, and would likely have a much more favorable revenue impact than what this report shows.
The Treasury Department estimated that President Biden’s proposal to revise our global minimum tax rules to comply with and go further than the international agreement would raise $493 billion over a decade.
Treasury also estimated that a related proposal to implement another part of the international agreement, the Undertaxed Profits Rule (which limits tax breaks for companies based in countries that are not complying) would raise an additional $549 billion over a decade.
The notion that we are better off allowing our corporations to pretend their profits are earned in the Cayman Islands or Ireland simply defies logic and the facts. There is no scenario presented in the JCT report in which the U.S. would be better by ditching the international agreement that the government already negotiated.