The Tax Cuts and Jobs Act of 2017, despite being presented as a life-transforming reform of the tax code, has largely failed to fulfill its promise of stimulating job creation, investment or economic growth. This significant change in the tax rulebook has rather led to widespread and institutionalized corporate tax avoidance, with loopholes resulting in major deficits.
To combat this pervasive issue, the implementation of a global minimum tax by the Congress seems to be the most permanent and comprehensive solution. The recent budget proposal by President Joe Biden, advocating for the adoption of a global minimum tax, is a step towards achieving this goal. The proposal ensures that all multinationals pay the least a 21% minimum rate on their earnings in every jurisdiction, implying an end to tax rates’ race to the bottom and establishment of a fair and level playing field for U.S. businesses.
Last month’s analysis by the Institution on Taxation and Economic Policy shows how loopholes allowed 342 of the most profitable companies to achieve an average effective tax rate of 14.1%, which is notably less than the already decreased rate of 21%. What was initially perceived as an intelligent tax policy intended to stimulate domestic investment and growth has turned out to be nothing more than a corporate handout.
As such, it’s imperative that advocacy for a global minimum tax is revisited promptly, even as Biden administration’s existing corporate tax policies are in limbo, and the presidential election approaches. This is not only important to maintain the legitimacy of the corporate tax framework but also to ensure that corporate tax reform has a place on the election ballot.
Furthermore, it’s evident that any high-level policy solution to corporate tax avoidance must include corresponding measures for tax transparency, requiring corporations to disclose the value and nature of tax benefits and credits received across all jurisdictions. This would offer greater insight into the tax strategies pursued by corporations, helping tax authorities, the public, journalists, interested taxpayers and investors.
However, being reactive to individual loopholes, avoidance strategies, and tax havens resembles a short-term solution akin to waterproofing a leaking roof. Even though the TCJA may have promoted a pursuit of corporate tax avoidance, it didn’t create the problem.
Lamentably, the US is yet to join the G20 and OECD initiative for a global minimum tax of 15% – a drive that has been embraced by more than 140 countries as of 2021 (Pillar Two). Not joining the initiative has absented the US from tax revenue benefits from other signatories and available revenues that could be invested in crucial areas like infrastructure, health care and education are currently being missed.
In addition, US companies are already paying more taxes to those jurisdictions that have accepted the 15% global minimum. The US is just not reaping any benefit from it. What’s more, a global minimum tax might also bring about compliance and administration savings by discouraging harmful competition between corporations and nations.
Although proponents of the TCJA predicted substantial revenue growth that would counteract the inherent revenue losses in the corporate tax rate, the actual budget impact, best estimates put it at loss between a $1 trillion and $2 trillion in its first decade.
With the looming expiry of many of the TCJA’s cuts to personal income tax by the end of 2025 and its resultant reduced pressure for the adoption of a global minimum tax, it is pressing not to ignore the fact that the corporate tax system is permanently changed. The present system with its loopholes facilitating widespread tax avoidance is eroding public trust and harming the nation’s ability to compete globally and invest in the future.
As such, the implementation of a global minimum tax provides a solution that promotes fairness and equips us to avoid corporate tax avoidance. Absent considerable intervention, ad-hoc tax policy initiatives wouldn’t be sufficient to buffer the revenue harm inflicted by the TCJA.
This article was inspired by commentary from Andrew Leahey, a tax and technology attorney, principal at Hunter Creek Consulting, and adjunct professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social