The Global Minimum Tax: Tough Sellin’ for Yellen

Editors’ Note: This piece touches on politics, and as such, we remind you that MarketMinder favors no political party nor any politician. We assess developments solely for their potential market impact.

On the heels of President Joe Biden pitching and stumping for his infrastructure plan—and its embedded corporate tax hike from 21% to 28%—Treasury Secretary Janet Yellen has been doing some related stumping. Yellen, it seems, is championing a 21% global minimum corporate tax rate. Wednesday, the G-20 said they will discuss her idea this summer, which has pundits treating her plan as if it is—or is soon to be—a fait accompli. But, friends, whether you love or loathe this plan, we suggest keeping your emotions in check. This is going to be some very difficult sellin’ for Yellen.

The rationale behind Yellen’s proposal is straightforward enough. A central tenet of economic theory holds that people (and businesses) respond to incentives. Taxes are one such incentive. The more you tax something, the more you incent a business to find ways around it. Worldwide, nations’ approach to taxing corporations varies pretty widely. Hence, multinational corporations have long sought to domicile in nations with friendlier systems. Yellen and Biden, perhaps rightly, fear hiking US corporate taxes could lead some US multinationals to seek friendlier shores elsewhere.

If all this sounds familiar to you, give yourself a point or two. The last two US administrations tried to dial down legal US corporate tax avoidance. This underpinned the Obama administration’s regulatory action barring “corporate inversions”—in which a larger US firm would merge with a small one in a low-tax nation and adopt the acquired firm’s residence—in 2015. It also was a key factor behind the Trump administration’s corporate tax cut from 35% to 21%, which Biden aims to partly undo. (The 2017 tax reform also changed the treatment of income earned abroad, removing the incentives against repatriating it and largely erasing the benefits of inversions.) Furthermore, the idea of preventing a “race to the bottom” on tax rates has long circulated among academics and pundits.

A global minimum tax also seemingly builds on efforts to tax firms’ digital revenue. As we have documented, there is a significant push, mostly in Tech-light Europe, to tax the local revenue of multinational Tech firms—a “Digital Services Tax.” Some countries, including the UK and Spain, have already enacted one. For years, the Organization for Economic Cooperation and Development (OECD) has been trying to coordinate these efforts, establish a universal rate and better define rules about where revenue stems from. Those efforts, in part because of US stalling, have born little fruit thus far.

The Yellen/Biden plan seems to not only endorse such moves, but build on them. The new US initiative wouldn’t just apply to digital services revenues. It would apply to all multinationals. With the US on board, some presume other nations will fall in line. Zip, bang, boom—global tax done.

But there are still significant problems with this. For one, it presumes Biden’s tax plan will pass—no sure thing. While the Democrats have the edge in both the House and Senate, that edge is tiny—and they can’t count on Republican support for a tax hike. They can afford few defections in the House and none—zero—in the Senate, presuming they use budget reconciliation to avoid a possible filibuster. Yet already, it seems some Democratic senators have qualms about the planned move. West Virginia Senator Joe Manchin recently noted that he and several other Democrats think Biden’s hike to 28% is too much.^[i] He floated 25% as an alternative, but it isn’t clear whether this can win unanimous support, either. If the US doesn’t hike its tax rate, the Yellen proposal amounts to asking the entire world to adopt its rate as the global minimum. This … is not likely to go over well.

But even if America does hike corporate taxes, consider: US objections aren’t the only reason there is no OECD digital tax. Many nations use low corporate taxes as a means to entice businesses to domicile there. Ireland and its 12.5% corporate tax is the poster child for this, but it isn’t alone. Ireland and other low-tax EU nations have rebuffed countless Brussels-led efforts to get them to “harmonize” their rate at levels closer to their 26 peers. If they won’t agree to this, what chance does Yellen have persuading them—and over 130 other countries—to enact a minimum?

Lastly, consider: The American tax code has shifted with elections in the past few administrations. If you are a foreign leader, what confidence do you have that it won’t shift again come 2024?

For markets, all the attention paid to this means that even if Yellen and Biden manage to strike a global deal, it likely wouldn’t impact markets much. It may even be a positive, to a limited extent. For years, the debate over this-or-that nation enacting digital services taxes has stirred occasional uncertainty for Tech firms. This is more nuisance than major headwind, but a global minimum tax would likely end the chatter.

But the likelihood Yellen’s tax, for better or worse, actually goes global in any timeframe markets really care about seems minuscule to us.