The fight against economic inequality took a big step forward last year, when 136 of the world’s nations agreed to impose a minimum tax on corporate profits. Brokered by the OECD, the idea was to prevent companies from shifting their earnings to tax havens in a race to the bottom that boosted shareholders at the expense of the public.
The only problem? Someone had to go first and impose that tax. And for it to stick, it would likely need to be the US or the European Union, the two largest economic blocs. In the US, that hope seemingly died last week when Senator Joe Manchin, the conservative Democrat who often sets the agenda for the party’s tiny majority, rejected the idea.
“We’re not going to go down that path overseas right now, because the rest of the countries won’t follow, and we’ll put all of our international companies in jeopardy, which harms the American economy,” Manchin said on the radio in his home state of West Virginia.
And yet, last night, Manchin announced his support of a new bill, the Inflation Reduction Act. It includes a 15% global minimum tax on US corporations
The corporate tax made it into the deal with Manchin because it’s different than what the OECD proposed. It acts an alternative tax on total corporate income that allows companies to take certain deductions and stash earnings overseas. Tax experts say that to fully comply with the OECD plan, the US would still need to change a a tax on foreign income called GILTI that was enacted in 2017, by raising the rate to 15% and adopting it on country-by-country basis.
This new proposal is “a domestic tax that...ensures there is a minimum level of tax paid on the book income of the US corporations,” explains Manal Corwin, a former Treasury official who now works for the accounting firm KPMG. “The global deal is with reference to applying a minimum tax on the offshore earnings of businesses.”
Manchin’s proposal took Washington by surprise, but there’s no guarantee that the Inflation Reduction Act won’t be derailed by Arizona’s Democratic Senator, Krysten Sinema, or conservative Democrats in the House of Representatives.
But if it gets enacted, besides increasing government revenues by $313 billion over the next 10 years, the US global minimum tax on corporations could have unpredictable effects around the world.
“[Enacting this] could influence EU adoption, to the effect that Europe looks at us and says, ‘the Americans may not go ahead with this,’ if the US does not take a step out on enacting a foreign minimum tax in line with [the OECD agreement],” Thornton Matheson, an expert at the Tax Policy Center, says. On the other hand, “the US already has a minimum tax on the foreign income of US multinationals, which pretty much no other country has.”
Treasury secretary Janet Yellen has been a major booster of the OECD deal. The Treasury did not respond to our questions about this deal. But tax experts expect the Biden administration to continue boosting the OECD proposals, arguing that the US tax regime for corporations is closer to that ideal than any other large economy.
While the OECD deal is generally seen as a win for economic equality writ large, some developing nations, like Kenya and Nigeria, worry that the rules will rob them of existing tax revenue without replacing it.