Opinion

Dec 17, 2023

David Kamin is a professor at New York University School of Law and served as deputy director of the National Economic Council in the White House from 2021 to 2022. Rebecca Kysar, a professor at Fordham University School of Law, served as counselor to the assistant secretary for tax policy in the Treasury Department from 2021 to 2022.

The new Republican Chairman of the House Ways and Means Committee, Jason T. Smith (Mo.), took his gavel professing a laudable commitment to "small business, working-class Americans and farmers over big corporations." Smith is right that large corporations "get big tax advantages."

You would think then that he would support the global minimum tax deal approved by nearly 140 countries in 2021. The deal aims to deter large multinational corporations from shifting profits abroad to avoid taxes at home, removing an advantage such corporations have over Main Street businesses and typical citizens.

Yet, far from throwing support behind the global minimum tax, Smith and House Republicans are doing everything to undermine it. This is especially surprising given that the deal echoes an idea Republicans themselves enacted in 2017.

In recent weeks, Republicans proposed legislation designed to punish individuals or companies from countries that enforce the global minimum tax. Under this proposal, individuals or companies from those countries would face higher taxes on investment in the United States. Essentially, this is an attempt to use U.S. economic power to break apart the global coalition and stop the global minimum tax deal from being enforced.

And, Smith has matched the proposal with rhetoric describing the deal as a "global tax surrender." Although Smith says he is looking for ways to stand up to big corporations, he and House Republicans are playing right into their hands.

Democrats will almost certainly oppose the proposal, dooming its prospects for immediate enactment. But that doesn't mean this effort won't do significant harm. The Republicans are sending the wrong message to the world about what should be a commitment to the principles of a global minimum tax across the U.S. political spectrum.

In the 2010s, corporate profits went up even as corporate revenue declined as a share of the economy. This was partly the result of corporate tax cuts enacted in the Trump administration's 2017 Tax Cuts and Jobs Act. But rising corporate profits and falling revenue are also explained by the trend for large U.S. corporations to report more of their profits abroad, often in low-tax jurisdictions, rather than at home.

Supporters of the Trump tax cuts argued that a much lower corporate tax rate would dissuade companies from shifting profits abroad. But a better way to address the problem — that doesn't favor big corporations — is to dissuade countries from engaging in a race to the bottom on corporate taxes in the first place. That was the premise of the global minimum tax deal, with a minimum rate of 15 percent tax on corporate earnings around the world.

Smith and other Republicans have criticized the global minimum tax deal because, they say, it doesn't effectively curb the long-standing use of direct subsidies to big corporations, and so allows countries to try to tilt the playing field that way. They have a point. We should try to avoid a subsidy race — especially if it's with allies with whom we should be cooperating.

But we should also be realistic about how hard it is to restrict direct subsidies. Limiting these kinds of subsidies would pose a threat to recently enacted incentives to encourage semiconductor manufacturing in the United States, for instance.

Even more important, the global minimum tax deal helps address some forms of competition favoring big corporations — the race to lower the corporate tax rate. It's surely better to deal with some problems rather than none.

Republican opponents of the global minimum tax deal also complain that it potentially gives foreign tax authorities too much power over U.S. corporations. Under the terms of the deal, countries can impose taxes on foreign corporations operating in their country that pay less than 15 percent anywhere in the world. But, this enforcement mechanism is necessary to ensure tax havens can't undermine the agreement and the U.S. tax base by continuing to offer extremely low tax rates and attracting profits from other countries. The answer is not to fight enforcement of the deal but rather to implement it — and collect the revenue ourselves.

Republican opposition to the deal is especially wrongheaded given that it builds on an idea that Republicans themselves put forward in 2017 under the acronym GILTI, for Global Intangible Low-Taxed Income.

The GILTI tax applies a minimum tax to the profits reported abroad by U.S. corporations. It was a good start, but it was set at a rate that was too low and allows gamesmanship across countries that needs to be addressed. And it left U.S. corporations in the uncompetitive position of being the only ones on Earth paying a tax like GILTI.

Policymakers from across the political spectrum are now targeting 2025 for the next major tax overhaul. Though most of the corporate tax cuts from the 2017 law are permanent, roughly $350 billion per year in individual income and estate tax cuts expire then. It's a political reality that leaders will be searching for ways to pay for any extension, and implementing the global minimum tax deal can help.

Republican lawmakers opposed to the global minimum tax deal risk leaving the United States with a shrunken corporate tax system where the U.S. treasury, as well as typical Americans and small businesses, are on the losing end of international tax competition. Instead of political posturing, lawmakers should support implementing the global minimum tax deal, not threatening retaliation against countries that try to enforce it.