Stopping the Race to the Bottom on Taxes
Bloomberg Businessweek|April 19, 2021
The U.S. is energizing a global effort to put a floor under corporate tax rates
Peter Coy

When I interviewed Kimberly Clausing in 2017, she was an economics professor at Reed College in Portland, Ore., with intriguing but seemingly unachievable ideas for how to make multinational corporations pay taxes. I wrote that her plan was worth studying “if only to see how much better things could be if politics didn’t get in the way.”

Well, look at her now. In January, just five days after starting a new job at UCLA School of Law, she was offered the position of deputy assistant Treasury secretary for tax analysis. She took a leave from UCLA a month later to make the move to Washington. Her boss, Treasury Secretary Janet Yellen, and her boss’s boss, President Joe Biden, have embraced international cooperation in fighting tax avoidance. And the long-shot agenda that Clausing and a circle of academics and activists campaigned for is suddenly looking doable. “There is a strong international consensus around addressing these problems, and our action can encourage action abroad,” she said in February in testimony to the Senate Finance Committee.

After decades of undermining one another, 139 rich and poor nations are closing in on a framework for taxing multinational corporations that would be the biggest change in the system since 1923. The goal is to create a united front to prevent corporations from playing one country off against another, recognizing that a race to the bottom in taxation has no winner, only a bunch of revenue-deprived losers.

Multinationals are worried. On April 12 the Business Roundtable, which is the voice of large U.S. corporations, released a member survey showing 76% of chief executive officers believe that one key plank of the Biden plan—doubling the rate on profits earned abroad—would do “moderately” to “very” significant harm to their competitiveness. “The proposed tax increases on job creators would slow America’s recovery and hurt workers,” Business Roundtable President and CEO Joshua Bolten, who was President George W. Bush’s chief of staff, said in a statement.

Taxation of multinationals is a brain-taxing subject, filled with reform jargon like Pillar One, BEPS, GloBE, and Gilti and minimization tactics such as “patent boxes” and “the double Irish with a Dutch sandwich.” The complexity is the outcome of a cat-and-mouse game in which regulators close loopholes and corporate tax lawyers quickly discover new ones.

The underlying problem is simple, though. Individual nations operating on their own, no matter how big and powerful, can’t easily corral corporations that operate across borders and can shift operations—or even just reported profits—to tax havens such as Bermuda and the Cayman Islands. The Organization for Economic Cooperation and Development estimates that this shell game deprives government coffers of as much as $240 billion a year. So joining forces is essential.

The Biden administration’s enthusiasm for squeezing more tax revenue out of multinationals has given fresh impetus to a yearslong project of the Paris-based OECD and the Group of 20, which includes many of the rich countries in the OECD, along with others such as Brazil, China, India, and Indonesia. Almost 100 smaller nations have been invited to participate, making it a truly global effort.

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