Is Biden’s global corporate tax a revolution - or a retreat?

No sooner did US President Joe Biden persuade his G-7 partners to back a historic global minimum corporate tax last week than critics began to find fault with it—and not just the most predictable holdouts, like some multinational corporations and the tax havens they favor, such as Ireland. Biden is also taking flak from left-leaning activist groups and the progressive wing of his Democratic Party, who think he's asking too little of the world's plutocrats. 

One of the key issues is whether Biden and other world leaders are acting too meekly by demanding a minimum global corporate tax of at least 15 percent. "It's absurd for the G7 to claim it is 'overhauling' a broken global tax system by setting up a global minimum corporate tax rate that is similar to the soft rates charged by tax havens like Ireland, Switzerland and Singapore," said Gabriela Bucher, the executive director of the global anti-poverty organization Oxfam, in a statement. "They are setting the bar so low that companies can just step over it."

It's not quite that low a bar. First, the effective rates currently charged by tax havens such as Ireland are far below that 15 percent minimum: Ireland's nominal rate is 12.5 percent, for example, but because of assorted breaks it gives to corporations the actual rate is less than 1 percent for many corporations, especially Big Tech companies like Apple. The same is true of such other notorious tax havens as the Cayman Islands and Switzerland.

Secondly, and perhaps more importantly, Biden's proposed change would not just set a new corporate tax rate—it would revolutionize the international financial system by taxing, for the first time, profits on goods and services in jurisdictions where companies are not headquartered. Traditionally, multinationals only paid such taxes in places they were physically located, such as tax havens. If Biden's proposal becomes policy, it means countries large and small—rich and poor—that could never get even a tiny portion of a multinational's profits in the past will be able to now. This has never been done before. 

"If tax havens like Ireland, Switzerland, and Singapore don't think this is a big deal, then why are they trying so hard to stop it?" said one senior financial expert who is directly involved in the G-7 talks, who requested anonymity in discussing confidential negotiations. Beyond that, he said, if even a 15 percent minimum rate is set, "are the big multinationals going to continue doing all the tax engineering to tax it offshore?" Such financial maneuvering is expensive, and the new plan "eliminates a lot of the incentives for using tax havens," he contended. 

Perhaps the more reasonable objection to Biden's proposal—which is mainly built on a previous plan put forward by the OECD—is that by settling on 15 percent as a minimum standard, the major economies are giving away too much at the outset. Biden had originally asked for a 21 percent rate, but to gain adherents he agreed to lower that demand to "at least 15 percent." A senior administration official, who also requested anonymity to discuss confidential negotiations, said that Biden is intent on reversing the current system of "overtaxing labor and not getting enough contribution from corporations." In an interview last week, the official cited data showing that the share of US federal revenue that comes from taxing labor rose from 50 percent in 1950 to more than 80 percent today, while corporations saw their share drop from 30 percent in 1950 to less than 10 percent at present. The Biden administration is also hoping that by raising the domestic corporate tax rate from 21 percent to 28 percent, it can reap more than $3 trillion to help pay for its expensive jobs and infrastructure proposals.

In a statement, US Treasury Secretary Janet Yellen—a longtime champion of labor—said that Biden's global minimum tax "would end the race-to-the-bottom in corporate taxation, and ensure fairness for the middle class and working people in the US and around the world." But as French Finance Minister Bruno Le Maire said this week, the 15 percent proposal is only "a starting point. And in the coming months, we will fight for that global minimum corporate tax to be as high as possible."

Nobel Prize-winning economist Joseph Stiglitz, a progressive who is a longtime friend of Yellen's, agrees with her that the current proposal will "begin to stop the race to the bottom." But he said in an interview that the global minimum tax proposal, known as "Pillar 1" in the agreement, is "badly flawed—influenced too much by the multinationals." Stiglitz said that without a higher starting rate—say, a minimum tax of 21 percent—the risk is "that the minimum tax becomes, de facto, the maximum tax."

"We underestimated our economic power," he said. "If Germany, France and the US all agree, they have enough economic power among them to force the issue. What company is going to say, 'I'm not going produce or sell in those countries?'"

Economists who favor the proposal argue that even at 15 percent, multinationals may well decide they have no choice but to go along. Supporters of the plan also contend that such a level may be sufficient to induce major global corporations to stop moving their headquarters to tax havens. In other words, if the global minimum is just high enough but not too high, the multinationals could calculate that it's better to pay the required tax and remain on the New York Stock Exchange rather than flee to tax havens abroad.

"If the minimum tax agreement is actually implemented, we will see a paradigm shift in international taxation," Daniel Reck, an economist at the London School of Economics, said in an email. "It will not solve all problems; there will always be disagreements about which country should have the right to tax what part of companies' profits. But it should end the era of zero effective tax rates on large portions of corporations' global profits."

Notably, some of the Big Tech companies such as Facebook have already recognized the handwriting on the wall. In statements they've made in recent days, the digital giants have indicated that they may prefer the current proposal to the digital services taxes they are being encumbered with around the world, especially by the European Union. Biden's plan would replace such randomly imposed taxes.

"We strongly support the work being done to update international tax rules," Google spokesman José Castañeda said in a statement. "We hope countries continue to work together to ensure a balanced and durable agreement will be finalized soon." In a tweet, Facebook spokesman and former British Member of Parliament Nick Clegg said: "We want the international tax reform process to succeed and recognize this could mean Facebook paying more tax, and in different places."

Why is Silicon Valley seemingly so game? Perhaps because the current Biden proposal targets only profits, not overall revenues currently targeted by digital taxes, and the tech giants know they may come out better in the end. The tech industry prefers that levies like France's 3 percent tax on online revenues such as targeted advertising and the sale of data be replaced by a stable and agreed-upon tax on what are called "residual" or excess profits (amounts above 10 to 20 percent declared profits), which the digital giants have avoided paying taxes on until now. 

Critics such as Stiglitz say the current proposal is also too "modest" in targeting only these excess profits rather than 100 percent of the multinationals' global profits.

But raising the corporate minimum tax rate further may not be politically practical. Biden and other leaders who have been trying to curb tax evasion by major corporations face a huge challenge in getting any new tax approved. For example, China, which is the second-largest economy in the world and an influential member of the G-20, has built its wealth on decades of offering generous tax incentives; it's going to need assurances that it can continue such policies. Even an agreement among European countries will be a challenge, because corporate tax rates in the 27-nation bloc vary widely. The G-20 nations will consider the proposal at a finance ministers meeting later this summer. 

For now, a long road to compromise remains, and Biden is playing the odds by starting the negotiations at 15 percent. If the proposal needs to be approved by the US Senate as a treaty, he may find himself in trouble: Treaties require two-thirds approval, and Democrats hold only half the upper chamber. (Some experts believe Biden could sidestep that by imposing the new tax as a regulatory adjustment set by the Treasury Department.) Moreover, European nations like France that have already imposed a digital services tax on Big Tech could find themselves stymied by their own parliaments, which may resist rescinding such taxes.

Another big issue ahead is whether, if the global corporate tax is ultimately approved by the G-20 countries at the leaders' summit later this year, it will even be enforceable in the more corrupt economies. Some governments may not have the will to collect from their corporate overlords: Brazil's construction giant, Grupo Odebrecht, has been implicated in recent government corruption scandals in the past decade that ensnared the nation's former president, Luiz Inácio Lula da Silva, and other prominent Brazilian politicians. 

"There's oodles of money all over Latin America, and if the plan goes through, rather than accepting that a company like Odebrecht can hide that money in the Cayman Islands, Brazil will be able to take 15 percent from Odebrecht. That will help Brazil," said the official involved in the negotiations, which are being led by the OECD. "But the question is: Will the Brazilian government have the juice to do it?

"Some of these big companies have influence over the politics in their country. So what happens then?"

Michael Hirsh is a senior correspondent and deputy news editor at Foreign Policy. Twitter: @michaelphirsh

Disclaimer: This article first appeared on Foreign Policy, and is published by special syndication arrangement.