Earlier this week, Treasury Secretary Janet Yellen traveled to Poland to try to pick up some broken pieces from the major global tax deal she secured last year. If it’s enacted, the international agreement, which brought together over 130 countries to set a minimum corporate tax rate, would trigger the biggest overhaul in the global tax system in a century.
But the road from brokering the agreement to actually enacting it now seems uncertain as some countries are starting to get cold feet. The European Union, for example, delayed enacting its corporate tax hike, and Poland has expressed reservations about whether such a tax would even be effective.
For her part, Yellen is doing the right thing by trying to put this deal back on track. For too long, corporate giants have bullied countries by moving their headquarters to tax havens (or at least threatening to do so) whenever governments have tried to increase tax revenues. As Yellen told The New York Times, “No country really feels it can act independently to raise taxes because its firms will be uncompetitive, so the only way to do this is to hold hands and say enough is enough.”
As nice as that sounds, there is one big problem that haunts Yellen’s hand-holding effort: The United States is itself not on track to complying with the international tax agreement that it’s trying to sell to the rest of the world. While the Biden administration has tried to revamp the US tax code in negotiations with Congress in a way that would have allowed the United States to adhere, at least in part, to the global tax deal, those talks have so far failed, from the Build Back Better legislation to more recent negotiations with Senator Joe Manchin.
If Yellen or the president himself want to have any credibility while continuing to negotiate the international tax agreement, then they have to find a way to get Congress to pass legislation to comply with it as quickly as possible. Failure to do so before the midterms, when Republicans could regain control of Congress, would all but guarantee that one of the president’s potential signature achievements would go by the wayside.
The multilateral agreement would do two things: It would set a global minimum corporate tax of 15 percent and impose new taxes on tech giants wherever they sell their digital goods and services, even in countries where they don’t have a physical presence. Congress can raise the minimum corporate tax rate to at least 15 percent — up from 10.5 percent — through budget reconciliation and a party-line vote as a result. But the other part of the deal is a little trickier because it may require making changes to existing tax treaties, which means that the Biden administration would need the support of Senate Republicans, since treaty changes require a two-thirds vote in the Senate.
Even if the United States is only able to comply with one part of the deal, that would be a big win and give the agreement a much more solid footing in future international negotiations. It would also pave the way for the United States to raise taxes on corporations without the risk that US-based companies would move elsewhere — a critical component of any plans to increase social spending or reduce the deficit. And while Manchin may not support all the taxes President Biden proposed in his budget earlier this year, the president should press the West Virginia Democrat to, at the very least, support this component of the deal.
Republicans have so far indicated that they are unwilling to support any part of the tax deal. But their stance would put the United States in a much weaker position around the world. Failing to partake in international agreements only serves to diminish America’s role in shaping them, not to mention that it significantly reduces the country’s ability to rely on those agreements when engaging in diplomacy. If the United States is no longer a leader in the global financial system, for example, then it would have trouble building coalitions to impose sanctions or crack down on international money laundering schemes, as it is currently successfully doing in response to Russia’s invasion of Ukraine.
Yellen has expressed confidence in Congress doing its part when the time comes. But given how far the Senate seems to be from passing tax legislation, Yellen’s time may be better spent negotiating with lawmakers in Washington rather than Warsaw — at least for now.
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