Spare America From Yellen’s Global Tax

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Treasury Secretary Janet Yellen speaks during a news conference at the Treasury Department in Washington, D.C., April 21.



Photo:

Ting Shen/Bloomberg News

Treasury Secretary

Janet Yellen

and her political allies are indefatigable in their attempt to railroad Congress into agreeing to a global tax deal, and their latest argument is that the pact will be good for U.S. competitiveness. If only that were true.

At issue is an agreement last year at the Organization for Economic Cooperation and Development to upend century-old international tax principles. The first prong is a form of excess-profits tax targeted primarily at the largest U.S. tech companies, to be applied in markets where they operate rather than where they are headquartered. The second is a minimum effective tax rate of 15% to be applied to the profits of global firms.

Ms. Yellen and the plan’s other backers say this will end a supposed “race to the bottom” on tax rates, although that race is mostly a figment of the left’s imagination. Lately they’ve added another argument: Implementing the OECD deal will boost U.S. competitiveness by reforming America’s dysfunctional tax system while protecting companies from punishing foreign taxation if other countries implement the OECD plan and America doesn’t.

If Ms. Yellen wants to reform U.S. taxation of overseas profits, we can only say be our guest. The U.S. for decades taxed American companies’ global profits, already an uncompetitive set-up, but did it in a way that provided incentives for companies to invest outside the U.S. rather than repatriating their earnings. The 2017 Tax Cuts and Jobs Act made important progress in reforming that mess, but room for improvement remains on matters such as the tax treatment of past losses.

But Ms. Yellen and Congress don’t need foreign help to fix those problems—and the OECD plan could put U.S. companies at a disadvantage globally. For instance, the OECD offers more generous tax treatment for subsidies disguised as refundable tax credits of the sort that are common in Europe, while cracking down on the form of nonrefundable tax credit more common in the U.S.

That illustrates how one point of the OECD plan is to prevent exactly the sort of tax-policy experimentation that can benefit the U.S. over the longer term. Ms. Yellen’s solution to the tax-credit conundrum is to press Congress to switch toward refundable tax credits to stay within OECD rules. Congress should defend its ability to impose whatever rules on credits, or anything else, it thinks might benefit the U.S. economy.

Speaking of Congress, the politics belies the claim that a global tax would be good for U.S. companies. The Biden Administration supports the OECD effort because the White House and Treasury hope a global minimum tax will provide political cover for their own tax increases on corporate profits. But at almost every turn the Administration’s tax plans are worse than the OECD proposal, whether by imposing a higher effective rate than 15% or offering fewer deductions and exemptions.

Ms. Yellen wants Congress to believe this doesn’t matter because she and her peers have agreed to the OECD plan so it’s a fait accompli. Hardly. Efforts to implement the OECD deal in the European Union are stalled, and no one knows how China or India will interpret the proposed rules when—or rather, if—those countries rewrite their tax laws. Nothing would be worse for U.S. competitiveness than for Washington to rush into implementing a “global” tax deal that isn’t global at all.

Competitiveness is what lawmakers should debate when they talk about the tax code. But a global tax deal that’s bad for America and isn’t even global is the wrong way to do it.

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Appeared in the May 9, 2022, print edition.

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