In the words of Joe Biden, America is back. And multilateralism is the name of the game. On March 31 Biden announced his American Jobs Plan, a $2 trillion infrastructure investment plan that aims to revitalize America’s manufacturing, R&D activity, job development and more. Nestled in that plan is the Biden administration’s tax playbook for the U.S. — the Made in America Tax Plan. Much of the plan is about tax increases and tax enforcement. Biden wants to increase America’s corporate income tax rate from 21 to 28 percent, double its global minimum tax rate to 21 percent, and pour an extra $1 billion into the nation’s deeply underfunded Internal Revenue Service.
But Biden’s “Made in America” Tax Plan” transcends America. In the currently global battle to make digital giants like Amazon and Google pay more corporate income tax, Biden wants to ensure that corporations are paying their fair share around the world, or at least something closer to it. He wants other countries to adopt higher minimum tax rates. Essentially, his plan gives the OECD what it has coveted — some U.S. bu- in on the organization’s ambitious project to reform international tax rules — just as the clock nears midnight on the OECD’s mid-2021 deadline.
The Made in America Tax Plan: A Short Summary
Biden’s proposed corporate tax hikes have attracted the lion’s share of attention. However, they are just two parts of his administration’s multipart tax plan. Biden also wants to make it harder for U.S. companies to move their headquarters overseas to low-tax countries and reap the resulting tax benefits — a process known as “inversion”. A new proposal called the Stopping Harmful Inversions and Ending Low-Tax Developments (SHIELD) would tighten the nation’s anti-inversion rules and deny corporations tax deductions for payments made to low-tax entities. If U.S. companies move their jobs offshore, Biden also wants to block them from claiming lucrative deductions on their expenses. All of this would be bolstered by a new 15 percent minimum tax on book income reported by the country’s largest corporations. In addition to these new provisions, the plan would repeal a special tax deduction for certain export income earned by U.S. corporations — the foreign derived intangible income provision.
On the environmental side, Biden wants to eliminate tax preferences for fossil fuels to honor the country’s commitments to the Paris Climate Agreement and achieve net-zero emissions by 2050.
Pausing the Race to the Bottom
Before COVID-19, corporate income tax rates around the world appeared to be in freefall. In 2000, the average corporate rate in the OECD was 32 percent. By 2020, it hovered around 23 percent. Rates have also trended downward in non-OECD countries. The U.S. bucked this trend until 2017, when it reduced its corporate rate from 35 percent to 21 percent to become more competitive. Biden’s proposed corporate hike sends a strong message that America wants to reverse course on this race to the bottom, and it aligns with the OECD’s international tax reform goals. It’s a message rendered even more powerful by the fact that America’s closest ally — the United Kingdom — is planning to increase its corporate rate from 19 percent to 25 percent.
In 2017, the Trump administration tried to blunt the effects of corporate profit shifting by creating a 10.5 percent minimum tax mostly on foreign income earned from intangible property — the global intangible low-taxed income (GILTI) regime. That regime influenced the OECD’s pending minimum tax proposal (GLoBE). Biden’s proposed 21 percent GILTI rate now raises the stakes for GLoBE. The final GLoBE rate is currently under negotiation, but the OECD has mentioned a 12.5 percent rate, while some tax experts have called for a 21 percent rate. Several civil society organizations and developing economies’ interests claim 25 percent is the best number, especially for developing countries who rely more heavily on corporate income tax revenues. Since global average corporate income tax rates currently hover around 24 percent, setting a 21 percent minimum rate would create a tight fence around tax rate competition in an unprecedented way and likely make the OECD’s minimum tax more durable.
Another key change in Biden’s plan would be to calculate GILTI on a per-country basis instead of a blended basis. If the U.S. wishes to demonstrate its seriousness around profit shifting to low-tax jurisdictions, implementing GILTI on a per-country basis is the best way to do so. Tax experts like Kimberly Clausing have outlined in detail how profit shifting can still flourish when GILTI is calculated on a blended basis, because the averaging feature incentivizes corporations to seek countries where they can balance their average tax rate.
Ultimately, Biden’s proposal is good news for the OECD’s GLoBE, which also would apply on a per-country basis, because it aligns the U.S. to the OECD’s strategy. However, none of this will be fully effective unless other countries buy into the plan. In the coming weeks, economists will surely calculate what a 21 percent minimum tax might generate, and how it squares with the OECD’s current GLoBE estimations.
Building a Tax Administration of the Future
Over the past decade, the Internal Revenue Service (IRS) has been gutted by significant budget cuts, which have cost the agency billions of dollars in uncollected taxes. Biden plans to reverse this trend by injecting an extra $1 billion into the IRS, which he will pair with a broad enforcement initiative targeting tax evasion among corporations and wealthy taxpayers.
Globally, wealth taxation is under a bright spotlight due to COVID-19. While there has been a lot of debate, there’s been little consensus as to whether and how wealth taxation should be implemented. Biden’s focus on enforcement provides a viable alternative. America is not alone in its tax enforcement woes, as many taxing authorities around the world are trying to do more with less. Boosting the IRS’ budget and prioritizing enforcement could set an overall precedent, especially for taxing authorities in developing countries who have historically battled low collection rates.
All told, Biden’s Made in America tax plan sets a bold vision for what international tax competition should look like. Now, it is up to Congress to decide whether they want to enact these provisions, and it is up to the world to decide if it wants to follow America’s path.