Friedman and Rauh: Biden's global tax conspiracy

joe-biden” target=”_blank”>President Joe Biden<to 28% and increase the taxation of the foreign profits of U.S. multinationals may have deceptive appeal as an apparent tax on big businesses. 

Yet when those big businesses leave the U.S. to head to more friendly finance and take jobs with them, it is workers who would end up paying the price. Including the average state-level corporate tax, the statutory tax rate faced by corporations would rise to over 32% and return to the highest among the countries in the Organization for Economic Cooperation and Development (OECD).   

The risk of companies taking off is apparently not lost on the joe-biden”>Biden administration<

This collusion is the Biden Treasury’s proposed solution for avoiding a return to a never-ending game of whack-a-mole with U.S. corporations.

The Obama Treasury Department tried to force American companies to stay in the U.S. by issuing harsh rules against so-called inversions, in which a large American firm merges into a tiny foreign firm to dissolve its U.S. status and reincorporate in a foreign country. Yet restrictions against inversions predictably backfired. 

They simply caused foreign peers to acquire American companies. These acquisitions were much worse than inversions because they actually moved corporate headquarters, community involvement, and decisions about jobs and global supply chains out of the United States, in contrast to the paper change of an inversion. 

The Tax Cut and Jobs Act (TCJA) of 2017 replaced these perverse incentives with a U.S. tax rate that was internationally competitive, though still above the mid-point of OECD countries. It also limited the taxation of the profits of U.S. businesses abroad, while also imposing significant guardrails to prevent abusive practices. 

The tax code now encourages multinationals to bring operations back to the U.S. and makes it feasible for American companies to acquire foreign peers instead of causing the reverse.  

However, President Biden is pushing a politics of envy that puts “the pay gap between CEOs and their workers” above job creation and higher wages for all. 

Contrary to the president’s rhetoric implying that the tax cuts merely raised CEO pay, the TCJA resulted in historic job and wage growth, with the biggest percentage gains for non-managerial workers. 

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If the United States reverses course, we will throw away all this progress. And teaming up with the OECD to be the world’s tax policeman would be disastrous for many reasons. 

To be implemented, a global minimum tax would have to feature very detailed rules over every aspect of taxation, from cost recovery, losses, and interest deductibility, to tax incentives such as R&D and what kinds of businesses must be subject to the tax in the first place. 

The scheme would shift enormous power to the OECD Secretariat, which would start to look like the world’s IRS Commissioner. This would also be a backdoor through which to further strip tax lawmaking from Congress and place it in the hands of Treasury and its foreign counterparts. 

Why would the U.S. want to cede its sovereignty over its own tax rules in the interest of imposing high taxes on corporations – and why would we want to encourage other countries to give up theirs? 

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The Biden administration is trying force countries across the world to adopt its own preference for high taxes on corporate income regardless of the effect on employment and wages. 

It is hard to think of a more important attribute of sovereignty than each nation’s right to maintain and change its own tax rules in whatever manner its legitimate government sees fit.  

It’s not as though the administration is standing on very firm economic ground in demanding high levels of corporate taxation as a way of raising income. Basic logic suggests that workers are the ones who cannot get out of the way of corporate tax increases, while firms can shift their operations elsewhere. 

Plenty of evidence supports the fact that workers and consumers bear a substantial share of the corporate tax burden, and it’s impossible to imagine every country in the world abiding by the OECD’s minimum rates. So capital will always have a place to flee.   

To make matters worse, Treasury is trying to bribe other countries to go along by dangling the carrot of something else those countries want: the right to tax the profits of U.S. technology firms. The treatment would be symmetric, but even under Treasury’s recent proposal to include high-margin large companies in all sectors, the U.S. stands to lose the most from such an agreement. 

Never mind that foreign governments already collect sales and value added taxes on these sales – they also want to tax the profits of U.S. firms over which they have no traditional authority.  

So in order to raise one of the most inefficient possible taxes, one that in name lands on corporations but in practice lands disproportionately on workers and consumers, the Biden administration is proposing to cede sovereignty over our own tax rules, while also allowing foreign countries to tax the profits on U.S. operations of U.S. corporations.  

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Instead of this folly, the United States should oppose digital taxes and stand firmly behind traditional international tax rules prohibiting taxation that is removed from the actual location of value creation. 

Congress should carefully monitor developments at the OECD, insisting that any agreement be subject to the Constitution’s treaty clause, and reject accession to a global minimum tax. Instead of ceding the right of Congress to set tax policy, it’s time to recognize that in a world of inevitable global competition, implementing high corporate tax rates without bleeding jobs and depressing wages is simply a fool’s errand. 

Joshua Rauh is the Ormond Family Professor of Finance at the Stanford Graduate School of Business and a Senior Fellow at the Hoover Institution. 

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