The World Is Closer Than Ever to Making Corporations Pay Up

In the spring of 2018, Seattle’s City Council tried to force some of the world’s most valuable companies to help pay for affordable housing for residents who had been priced out of the market by the legions of Amazon and Starbucks millionaires. The measure, which passed unanimously, would have raised about $47 million each year through a tax on companies with annual revenues exceeding $20 million. The money was supposed to provide affordable housing and other services in a city with the United States’ largest homeless population after San Francisco and New York.

But the effort drew the ire of Amazon, which did not pay a dime in corporate tax to the U.S. federal government or its home state of Washington that year. The company spearheaded a business coalition that quickly raised more than $300,000 to lobby to overturn the new tax. Amazon announced that it would halt construction on a downtown office tower and sent a clear signal that it was prepared to move jobs out of Seattle. With the fight coming in the midst of the much-publicized bidding war among states to offer Amazon the biggest tax breaks for its project to build a second headquarters, the message was clear: If Seattle raised taxes on Amazon, the company could find friendlier places. Less than a month after passing the measure, Seattle’s City Council voted 7-2 to drop the new tax.

Seattle’s tax fight might seem like a local story, but it is now being waged on a much larger stage. U.S. President Joe Biden has proposed a significant increase in corporate taxes to pay for his $2.3 trillion American Jobs Plan, which would fund a massive boost in infrastructure across the country. Polls show funding the infrastructure bill through the increase in corporate taxes is highly popular, with two-thirds of voters approving. If he succeeds, Biden could reverse a decades-old trend in which corporate taxes go down but never go up, starving governments of badly needed revenue.

But like Amazon in Seattle, U.S. companies still have an ace in their pocket: They can vote with their dollars by moving investment, jobs, and profits offshore to lower-tax jurisdictions. That threat is the main reason corporate taxes have been falling around the world for decades. In 1980, corporate tax rates averaged more than 40 percent; by 2020, that average global rate had fallen by nearly half to less than 24 percent. The United States, which had not cut its corporate taxes since the mid-1980s, finally followed suit in 2017, when then-President Trump signed a bill to reduce the top U.S. corporate rate from 35 to 21 percent. Biden is now proposing to push it back up to 28 percent and to close loopholes that allow many large companies to avoid paying anything close to the headline rate. The plan is expected to raise $2.5 trillion over 15 years, more than enough to cover the rebuilding of roads, bridges, and schools and the expansion of high-speed broadband called for in Biden’s infrastructure bill.

The global front is where the fight to tax companies truly gets interesting. Assuming Biden can get the tax increase through the U.S. Congress—far from certain in the face of Republican opposition—the only way he can discourage the sort of capital flight blackmail that Amazon used to cow the Seattle City Council is to get the rest of the world to go along. That is exactly what the administration is now trying to do. And after decades of falling corporate taxes, the chances of success have never looked better.

Global tax avoidance has become the norm for many of the world’s wealthiest companies.

Earlier this month, U.S. Treasury Secretary Janet Yellen threw her weight behind the idea of imposing a global minimum tax on corporations, calling for an end to “a 30-year race to the bottom on corporate tax rates.” For the first time, the United States is genuinely embracing proposals from the Organization for Economic Cooperation and Development (OECD) to create a united front aimed at stopping tax-dodging corporations from playing one nation off against another. “The tax plan incentivizes the whole world to give up the game,” Yellen said.

Global tax avoidance has become the norm for many of the world’s wealthiest companies. As the engine of the economy has shifted from physical goods to digital transactions, the foundations of decades-old agreements on global tax cooperation have crumbled. The international regime on corporate tax dates all the way back to the ill-fated League of Nations in the 1920s, which established norms that based taxation on a company’s place of domicile and protected corporations against double taxation, by which multiple governments might levy taxes on the same income. The United States long ago extended these safeguards by allowing companies to defer indefinitely the payment of tax bills on overseas income.

Those measures were designed to protect companies against predatory governments; today, the problem is the reverse—governments must find a way to protect their revenue base against predatory companies. Technology, pharmaceutical, and other companies where intellectual property is the most valuable asset and physical location matters far less have become especially adept at such maneuvering. Today, seven of the top 10 locations for U.S. multinationals’ profits are tax-haven countries, including Bermuda, the Cayman Islands, Ireland, Luxembourg, and the Netherlands. While some of these places, such as Ireland, host actual corporate offices and production facilities, most of these are simply convenient addresses for reporting profits earned elsewhere and thereby escaping taxes. That has resulted in some bizarre financial anomalies—Luxembourg, with a population of 600,000, receives as much alleged foreign direct investment as the United States, and far more than China. Much of it consists of funds routed through Luxembourg entities for tax-minimization purposes.

To reverse this decades-old trend, the Biden administration is pushing for a new global minimum tax rate of 21 percent, which is still well below the proposed 28 percent U.S. rate. In practice, that would mean that a U.S.-headquartered company booking profits in tax-free Bermuda would be hit with a 21 percent tax bill from the U.S. government, while those booking in low-tax Ireland with its 12.5 percent rate would have to make up the difference. Finance ministers from the G-20 economies are negotiating a pact, with the goal of reaching an agreement in June. Most European nations are already onboard, a consequence of nearly a decade of work through the OECD and the European Union’s own efforts to crack down on tax avoidance within the bloc. Getting over the finish line will not be easy. Sticking points include how high to set the global minimum rate and how to treat the digital giants, where the Europeans want to take a bigger bite of the European profits earned by U.S. companies such as Apple, Facebook, and Google. The Trump administration threatened France and others with trade sanctions over the issue, but the Biden team favors higher taxes as long as they do not single out U.S. digital companies.

There are certainly good reasons to bet against success. In the Republican-led tax reform of 2017, Trump promised that he would crack down on companies dodging taxes abroad and that cutting the headline tax rate from 35 to 21 percent would attract a flood of investment to the United States. Instead, despite strong growth in fiscal year 2018, corporate tax revenues fell by 31 percent that year, the largest ever annual drop, and there was no appreciable increase in foreign investment.

Biden’s legislation is trying to avoid those pitfalls. Recognizing that other countries may be reluctant to sign on to a global minimum tax, his proposal would put muscle behind that proposal by denying tax deductions to companiesthat send payments to entities in low-tax jurisdictions, and he would do the same for countries that refuse to adopt a global minimum tax rate. The administration is also determined to mend relations with allies, of which Germany and France, in particular, are eager to get across the finish line with tax negotiations. The new Biden proposals have been greeted warmly even by countries such as the Netherlands that benefit from the current system. No less a realist than former U.S. Treasury Secretary Larry Summers told the Council on Foreign Relations last week that Yellen’s proposal was “a strong approach” with “a good chance of success.” It was time, he said, “to bring the issue of tax cooperation to the top table, where it’s never been before.”

U.S. companies, naturally, are pushing back, and the tax fight will be a test of how much sway they hold in Biden’s Washington. The Business Roundtable, an organization of American CEOs, said the higher corporate tax “would make the United States uncompetitive as a place to do business and make U.S. companies uncompetitive globally.” In a survey of the group’s corporate members, 98 percent said it would hurt their competitiveness. But the corporate positions are more nuanced than this opposition would suggest. Companies worry about their relative positions; if a foreign competitor enjoys a tax break or subsidy they are denied, that could pose a serious disadvantage. Instead of outright opposition to a global minimum tax, the Business Roundtable said that any U.S. minimum should be set through international agreement and aligned with other countries.