Intervention for the Global Economy

U.S. Treasury Secretary Janet Yellen is advocating a global minimum tax rate for companies operating overseas. Chances are good that it will actually happen.

America is again turning to face the world. President Joe Biden continues to reiterate this message clearly. In the same vein, Treasury Secretary Janet Yellen assured during her first big international speech that a stable and prosperous global economy is a core American interest. The sentence should be a matter of course, really, but during the four years of Donald Trump it was not. Shortly before the beginning of the (in this case, virtual) semiannual meeting of the International Monetary Fund and the World Bank, she also very clearly expressed support for a global minimum tax rate that large, multinational companies should pay. Chances are good that this tax rate will actually be imposed.

For the global economy, it would be an intervention the significance of which can hardly be overstated. It has long been vexing that large, international, digital companies could minimize their tax burdens by juggling headquarters and governments. As a result, the average member of the German middle class often pays comparatively more taxes than global corporations like Google or Facebook. In principle, the problem itself has already been recognized. The Organization for Economic Cooperation and Development, a sort of think tank of industrialized countries, is working on concrete plans for a global minimum tax rate. It was the disinterest of the U.S., above all, that prevented concrete results before now.

Yellen’s Push Has Nothing To Do with Altruism

That has fundamentally changed since Yellen’s address. The U.S. administration wants to push through a global minimum tax rate. But Yellen’s push has nothing to do with altruism or kindness toward allied nations. It is carried by huge self-interest on the part of the administration in Washington. And that is completely related to the altered role that the federal government has assumed in the U.S. economy since the COVID-19 pandemic. Biden first presented an infrastructure and relief package of $1.9 trillion that is boosting the entire economy. Now an infrastructure program of $2 trillion or more is supposed to be added to that. Whereas the first program is supposed to be funded by loans, Biden wants to finance the second by raising the corporate tax rate from 21% to 28%. The step is highly controversial, but may pass through Congress more easily if a global minimum tax rate reduces fears that the higher tax rates would disadvantage domestic companies compared to foreign competitors.

For Germany and the U.S., the change of course in the U.S. is a historic chance. They should direct great energy to negotiating an agreement that is as useful to as many as possible. That is not a matter of course; it depends on settling complicated details. But if a solution can be found, companies will be less motivated to move their profits overseas for tax reasons, as the president of the Ifo Institute for Economic Research, Clemens Fuest, says. “Dependability in international taxation could lead to fewer unilateral tax policy measures that cause double taxation.” In other words, if there were a global minimum tax rate, there would be even fewer reasons to introduce a new wealth tax to finance the anti-coronavirus measures. France could refrain from its controversial international digital services tax.

Even after the Pandemic Ends, the State Will Play a Bigger Role in Western Economies than Before

In the digital age, when one can no longer precisely say where geographically a service was rendered, uniform, efficient taxation of companies can be achieved only on an international level. The minimum tax rate should still allow competition between different countries’ taxation systems but will prevent a race to the bottom with tax rates, in order that governments can still finance themselves robustly. It may not be the end of tax havens, but it would at least reduce their importance.

Even after the pandemic ends, governments will maintain a much bigger role in Western economies than they had previously. Public investigations and billion-dollar investments are necessarily to rebuild and improve the economy. Even today, the United States’ deficit is comparatively just as it was at the end of World War II. No one knows if the massive debt incurred during the pandemic will lead to inflation and higher interest rates. Western democracies are being forced to confront increasingly aggressive competition from China’s state-sponsored capitalism. At the same time, the temptation of nationalism and protectionism is always present, including in Biden’s Buy American program.

In this context of radical change, it would be very valuable to have a reliable international framework for taxing multinational companies. We should take Yellen at her word.