Make taxes great again

Last Thursday 130 nations agreed to something that has eluded efforts for a long time.

Negotiations, revived by President Biden and under the auspices of the Organization for Economic Cooperation and Development (OECD, based in Paris), finally produced a blueprint for the most sweeping changes to the global tax system in the past 100 years.

The two-fold framework calls for a 15 percent minimum corporate tax rate in all 130 nations, as well as rules to force tech behemoths like Facebook and Amazon to pay taxes in nations where their goods and services are sold, even if they have no actual physical presence there.

President Biden hailed the agreement: “With a global minimum tax in place, multinational corporations will no longer be able to pit countries against one another in a bid to push tax rates down and protect their profits at the expense of public revenue. ... This will level the playing field and make America more competitive.”

He called the achievement “an important step in moving the global economy forward to be more equitable for workers and middle-class families in the United States and around the world.”

The fact that China, Russia and India signed on to the agreement is notable. The 130 signatory nations represent 90 percent of global gross domestic product.

The OECD estimates the new policy will generate $150 billion annually in additional tax revenues, part of which can be used in the United States to pay for infrastructure and education. Corporate profits will be reallocated from nations that host corporate headquarters for tax haven purposes, such as Ireland and some Caribbean countries, to other nations where they operate.

Negotiations toward last Thursday’s agreement had been underway for the previous four years. 

The negotiators had included the U.S. Treasury Department under President Trump, although the Trump administration delayed agreement last year by insisting that American corporations be able to choose their tax treatment around the world. Biden dropped that negotiating demand.

Not surprisingly, Ireland refused to sign on to the agreement. Its 12½ percent corporate tax rate, significantly lower than that of most Western nations, has generated billions of dollars for the Irish government. But Ireland agreed to continue its participation in the negotiations.

Other non-signatories, tax havens all, include Barbados, St. Vincent and the Grenadines in the Caribbean, Hungary and Estonia in Eastern Europe, Kenya and Nigeria in Africa, Peru in South America, and Sri Lanka in Asia.

Large signatory nations, like the United States and France, hope that raising taxes on companies’ headquarters in low-tax countries can persuade holdout nations to sign on. 

In addition to the $150 billion a year in additional tax revenues, the agreement will reallocate $100 billion annually in digital companies’ profits from their headquarters nations to other nations where they do business. 

That part of the agreement will require immense attention to detail among the 130 nations. Much, much work remains to be done. 

But the rewards, if achieved, will be great. 

Since 1980, the global average tax rate has dropped from more than 46 percent to 26 percent. In the United States annual revenue from corporate taxes relative to the size of the economy is now less than a quarter as large as it was in 1967.

It’s hoped that final agreement on the innumerable but necessary details of the plan can be achieved by the end of October. In that case implementation would begin in 2023.