US Rekindles Hope for Worldwide Fiscal Reform

A spectacular change of course by Washington raises hope for a major advance in the difficult international negotiations aimed at putting an end to the race to the bottom between countries over the taxation of multinational corporations.

The speech by the little white-haired lady with the Brooklyn accent has had the effect of a thunderclap in capitols and corporate offices around the world. The new American secretary of the treasury, Janet Yellen, let it be known this week, before the Chicago Council on Global Affairs, that the government of Joe Biden intends not only to reverse part of the tax cuts granted to businesses by his predecessor, but also to change the method of calculating what they owe for their profits earned overseas, and also to work for the implementation of a minimum worldwide tax for the largest among them.

These measures are aimed at yielding $2.5 trillion in supplementary fiscal revenues over 15 years, which would help to pay for an ambitious infrastructure investment plan of $2.3 trillion that the White House expects to graft on to its new economic aid plan and reintroduction of social welfare policies, amounting to $1.9 trillion. They would consist of bringing back the 28% official corporate tax rate that Donald Trump reduced from 35% to 21% in 2017. It would also double, from 10.5% to 21%, the minimum tax applicable on profits earned by American companies abroad in order to reduce the incentive to do business there. An important innovation: The calculation of this minimum tax would be done by country, with American businesses that would have found tax rates below 21% elsewhere paying the difference to the American treasury.

Aware that such tax increases risk ravaging American companies vis-à-vis their foreign competitors, Washington has also called for the adoption of a minimum worldwide tax rate that would still be at 21%. This tax would give the United States the right, like other countries, to tax multinationals registered abroad. As applied to their worldwide profits, it would be proportional to the part of their sales revenue earned in the national economy.

A 180-Degree Turn

The Biden administration’s proposal constitutes a complete reversal of position. Thus far, the American government (like several others) bet above all that tax reductions were going to stimulate business investment and, by extension, long-term economic growth. But the recipe is far from always effective, as shown by Trump’s final tax cuts, which American businesses used mainly to ratchet up the price of their own shares in order to increase their value, as noted by The Wall Street Journal a year ago. This time, it is instead a question of making sure to have the necessary tax receipts to invest not only in infrastructure, research and the green transition, but also in education and in a more adequate social safety net, without which all growth is impossible, Yellen asserted in her speech.

Until now, the American giant has mainly been the spoilsport in the delicate international negotiations seeking, for years, to adapt tax regulations to the digitizing of the economy, globalization and the Machiavellian ability of multinationals to find a way around taxes and to profit from the tax-related competition between countries. Pressed to act by populations infuriated by these abuses and exasperated by the lack of cooperation of the United States, more and more governments had come, in recent months, to consider the imposition of unilateral taxes on the web giants, simultaneously as a means of pressure and as a temporary solution. Interpreted by Trump as an attack against the jewels in the American crown, these initiatives had, suddenly, drawn threats of economic sanctions from the hot-headed president.

Change of Course

Today, the United States seems to have gone along with the “two-pillar” approach formulated tooth and nail by nearly 140 countries under the umbrella of the Organization for Economic Cooperation and Development; that is, a minimum worldwide tax rate and a country-by-country analysis rooted in the actual presence of businesses on the ground, experts observed this week. It is true that Yellen’s actual proposal would apply, at the very most, only to 100 or so of the largest firms, but still. With the Americans now on board, some are already dreaming of an agreement between the nations of the Group of 20 on a major reform between now and the beginning of July.

But it is perhaps going a bit too fast into the bargain. Yellen’s proposal is far from achieving unanimity in the American Congress, even in the Democrat camp, The Economist observed on Thursday. And then, noted Les Echos the day before, if the idea of a minimum worldwide tax seems to win over more and more countries, the rate thus far under discussion in the OECD turns more around 12.5% rather than the 21% referred to by Yellen.