Editors’ Note: This piece touches on politics, and as such, we remind you that MarketMinder Europe favours no political party nor any politician. We assess developments solely for their potential market impact.
On the heels of US President Joe Biden pitching his American infrastructure plan—and its embedded corporate tax hike from 21% to 28%—US Treasury Secretary Janet Yellen has been doing some related policy pushing. Yellen, based on her comments, is championing a 21% global minimum corporate tax rate. Wednesday, the Group of 20, or G-20, finance ministers from the world’s largest economies said they will discuss her idea this summer, which has many commentators we follow treating her plan as if it is—or is soon to be—a fait accompli. But whatever your view of this plan, we suggest keeping your emotions in check. We think this is likely to be some very difficult sellin’ for Yellen.
The rationale behind Yellen’s proposal appears straightforward enough. A central tenet of economic theory holds that people (and businesses) respond to incentives. Taxes are one aspect of such incentives. The more you tax something, the more likely you incentivise a business to find ways around it. Worldwide, nations’ approach to taxing corporations varies pretty widely. Hence, many multinational corporations have long sought to domicile in nations with friendlier tax systems. In proposing a global minimum tax, Yellen and Biden, perhaps rightly, might indicate they fear hiking US corporate taxes could lead some US multinationals to seek friendlier shores elsewhere.
This isn’t a new issue for multinational corporations. The last two US administrations also tried to reduce legal US corporate tax avoidance. This underpinned the Obama administration’s regulatory action barring “corporate inversions”—in which a larger US firm would merge with a small one in a low-tax nation and adopt the acquired firm’s residence—from 2014 – 2016.[i] In our view, it was also a key factor behind the Trump administration’s corporate tax cut from 35% to 21%, which Biden’s proposed increase would partly undo. (America’s 2017 tax reform also changed the treatment of income earned abroad, removing the incentives against repatriating it and largely erasing the benefits of inversions.[ii]) Furthermore, the idea of preventing a so-called race to the bottom on tax rates has long circulated amongst academics and commentators we follow.
A global minimum tax also seemingly builds on worldwide efforts to tax firms’ digital revenue. We have long observed a significant push, mostly in Europe, to tax the local revenue of multinational Tech firms—frequently called a “Digital Services Tax.” Some countries, including the UK and Spain, have already enacted one.[iii] For years, the Organisation for Economic Cooperation and Development (OECD) has been trying to coordinate these efforts, establish a universal rate and better define rules about where revenue stems from.[iv] Those efforts, in part because of US stalling, in our view, have borne little fruit thus far.
The Yellen/Biden plan seems to not only endorse such moves, but build on them. As outlined by the administration, the new US initiative wouldn’t just apply to digital services revenues. It would apply to all multinationals. With the US on board, commentators we follow presume other nations will back the global tax initiative.
But we think there are significant problems with this view. For one, it appears to presume Biden’s US-specific tax plan will pass—no sure thing, in our view. Whilst Biden’s Democratic Party has the edge in both chambers of Congress, that edge is tiny—and they likely can’t count on opposition Republican Party support for a tax hike. According to our analysis, Democrats can afford few party defections. Yet already, it seems some Democratic senators have qualms about the planned move. The senior Democratic Senator from the US state of West Virginia, Joe Manchin, recently noted that he and several other Democrats think Biden’s hike to 28% is too much.[v] He floated 25% as an alternative, but it isn’t clear whether this can win unanimous support, either. If the US doesn’t hike its tax rate, it might look as if the Yellen proposal is asking the entire world to adopt its rate as the global minimum. We don’t think this would go over well.
But even if America does hike corporate taxes, consider: US objections probably aren’t the only reason there is no OECD digital tax. Many nations use low corporate taxes as a means to entice businesses to domicile there. Ireland and its 12.5% corporate tax is the poster child for this, in our view, but we don’t think it is alone. Ireland and other low-tax EU nations have rebuffed countless Brussels-led efforts to get them to “harmonise” their rate at levels closer to their 26 peers.[vi] If they won’t agree to this, what chance does Yellen have persuading them—and over 130 other countries—to enact a minimum?
Lastly, consider: The American tax code has shifted with elections in the past few administrations. If you lead another nation, what confidence do you have that it won’t shift again after 2024’s US presidential election?
For investors, all the attention paid to this means that even if Yellen and Biden manage to strike a global deal, it likely wouldn’t impact markets much, in our view. It may even be a positive, to a limited extent. For years, we think the debate over this-or-that nation enacting digital services taxes has stirred occasional uncertainty for Tech firms. This may be more of a nuisance than a major headwind, but we think a global minimum tax would likely end the chatter.
But the likelihood Yellen’s tax, for better or worse, actually goes global in any timeframe markets really care about seems minuscule to us.
[i] “Fact Sheet: Treasury Issues Inversion Regulations and Proposed Earnings Stripping Regulations,” Staff, US Treasury, 4/4/2016.
[ii] “Tax Cuts and Jobs Act: A Comparison for Large Businesses and International Taxpayers,” Staff, US Internal Revenue Service, 9/10/2020.
[iii] “Digital Services Tax,” Staff, HM Revenue & Customs, 11/3/2020. “Report on Spain’s Digital Services Tax,” Staff, Office of the US Trade Representative, 13/1/2021.
[v] “Manchin Warns Biden’s Infrastructure Bill Is in Trouble Over Corporate Tax Hikes,” Ted Barrett and Nicky Robertson, CNN, 6/4/2021.
[vi] “Ireland Joins Growing List of EU Digital Tax Opponents,” Samuel Stolton, Euractiv, 8/10/2018.
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