Global Minimum Tax Deal Ropes US Into Subsidy Free-for-All

For the last two years, the Biden administration has touted a tall tale about its tax negotiations at the OECD—that the agreement they reached will end the race to the bottom and ensure big corporations pay their fair share in taxes.

But in a late-breaking plot twist, it is now apparent that the agreement may do the opposite: embolden countries to subsidize big businesses in government-favored industries. In the ultimate irony, the agreement’s new tax regime largely carves out government grants and certain tax subsidies, allowing countries such as China to game the system. Even Biden’s former chief negotiator at the Organization for Economic Cooperation and Development acknowledges the problem.

Unsurprisingly, an agreement rewarding subsidies would favor China. Democrats’ apparent solution? Attempting to stoop to China’s level by enacting hundreds of billions of dollars of green energy subsidies into law, which are now estimated to cost US taxpayers far more—potentially over $1 trillion. The Inflation Reduction Act created a new subsidy race to the bottom, and we are now trying to compete with China at a high-stakes game of socialism-lite that we shouldn’t even play.

How did we get here? Just a few years ago, Congress supported—on a bipartisan basis—the objective for the international tax negotiations taking place at the OECD: to end discriminatory taxation of US businesses. But the Biden administration decided to abandon that goal without consulting Congress, favoring rhetoric over substance when it negotiated a cartel-like global tax code that creates a trilogy of new taxes. As with any tax policy, the devil is in the details.

The first act of the agreement’s trilogy of new taxes mandated a 15% minimum level of tax on large companies across the globe. While the US already has a global minimum tax for its companies, created in Republicans’ 2017 tax reform law, the Biden administration capitulated on the Trump administration’s insistence in negotiations that our minimum tax should be treated as equivalent to any OECD-sanctioned one.

It gets worse. To secure this deal, under part two of the tax trilogy, the Biden administration agreed to the global tax code’s enforcement mechanism that invites foreign governments to pursue new discriminatory taxes against our companies. This extraterritorial enforcement mechanism—the Undertaxed Profits Rule—blatantly undermines important, job-creating tax policies passed by Congress on a bipartisan basis. Unsurprisingly, foreign governments—after securing much better treatment for their preferred incentive methods of subsidies and grants—eagerly agreed to a deal creating newfound opportunities to grab revenue from our companies.

The third part rubs salt in the wound. Not only did this administration negotiate a bad deal for US workers and businesses, the final act in this tax trilogy also will drain the US purse. The global tax code provides a sanctioned pathway for each foreign government to enact its own 15% domestic minimum top-up tax on income earned by large businesses in that country.

What’s the rub? The administration agreed to give foreign governments priority to soak up taxes collected by the US under the TCJA minimum tax. In other words, this administration handed each foreign government a robust vacuum to suck away tens of billions of dollars of our tax base—and then turn around to use those dollars to fund foreign subsidies.

How does that fly? It’s the result of the most indefensible position agreed to by the administration: the arbitrary and disparate treatment of investment incentives embedded in each tax in the trilogy. Specifically, the type of investment incentives Congress has traditionally enacted through the US tax code—nonrefundable tax credits such as the R&D credit—receive prejudiced treatment under the agreement compared to refundable credits and subsidies used more commonly in other countries.

This administration’s narrative that the global tax code will stop the race to the bottom in tax competition is intellectually dishonest and rings quite hollow. In reality, if one even believes in this rhetoric, the global tax code will create a more nefarious, supercharged push for increased subsidies and grants in government-favored industries.

Who will receive a leg up from this arbitrary distinction anointed by OECD technocrats and blessed by the Biden administration? The Treasury Department’s lack of transparency indicates they may prefer that US taxpayers and Congress not know.

Treasury has repeatedly declined to provide any data or analysis of the effect of the OECD deal on US revenue—not even to the nonpartisan Joint Committee on Taxation—so that independent estimates and analysis can be developed and provided to Congress. Nor have there been any public consultations or hearings in either congressional tax writing committee to discuss the agreement. It is almost as if the administration would rather hide the ramifications its tax trilogy will have on our economy.

But we don’t need the data to understand that a global tax code rewarding subsidies will boost Beijing. The hundreds of billions of dollars in annual subsidies China bestows on its favored domestic companies, which it does far more than other countries, are treated preferentially.

At bottom, this global tax code is an America Last policy. It undermines congressional sovereignty to enact tax policy and vaults foreign countries ahead by blessing their preferred methods of investment incentives, and it specifically cedes ground to China.

We don’t know how the administration plans to convince Congress to implement this agreement. Neither the administration nor congressional Democrats can unilaterally modify the US tax code or our treaties to implement it. While protecting US interests should be a bipartisan effort, congressional Republicans won’t sit idly by as US companies’ profits are taxed to benefit foreign countries’ coffers.

If other countries move forward with extraterritorial taxes, including the UTPR tax, we will be forced to pursue countermeasures to protect US workers, businesses, and the fisc. And if the OECD continues to encourage other countries to implement a global tax code that threatens US sovereignty and enriches China, they should be funding their work without the help of American taxpayers.

At bottom, the global tax code proclaims that “tax competition is bad, but government handouts are good.” Unfortunately, the Democrats bought into this subsidy race to the bottom when they enacted hundreds of billions of dollars’ worth of subsidies for their favored industries. We can confidently predict how a race against China on government handouts will end.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Mike Crapo represents the state of Idaho in the US Senate. He is the ranking member of the Senate Finance Committee.

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