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OECD Tax Revamp Should Not Forget China

Feb. 10, 2022, 9:45 AM

Governments around the world are considering enacting the Organization for Economic Cooperation and Development (OECD) global tax deal.

In the U.S., Democrats’ efforts focus on the revival of their multitrillion-dollar social spending program funded by tax hikes, which include portions of the OECD deal. But the Build Back Better Act and the OECD deal would severely harm America’s competitiveness while helping China. America’s greatest challenge this century is strategic competition with China, and standing a chance will require a greatly improved industrial base and a thriving workforce, not legislation that undermines them.

In a mostly overlooked October address to the OECD focused on countering China’s rising malign influence, Secretary of State Antony Blinken outlined the Biden administration’s view that decreasing taxes has not attracted investment or helped workers. But America’s experience has proven the opposite. The 2017 tax reform was part of a broader trade, regulatory, and tax agenda toward making the U.S. a top location to do business and hire workers. And after just two years, real household income increased by a record-shattering 7.2% over the previous year, in contrast to previous decade’s stagnation or 2021’s erosion in real wages.

Retention of our industrial base and technological edge requires policies that make the U.S. the best place in the world to invest and hire workers. That means we have to make it profitable for businesses to add more Americans rather than overseas workers. Wage growth particularly depends on increasing productivity, which also requires significant capital investments.

Making it more expensive to do business in the U.S. will cause companies to move activities abroad, taking jobs as they do. With the reset on reconciliation, the Biden administration’s proposal to increase the corporate tax rate by more than a quarter above China’s is still in play. That also would lift our rate from being in line with the OECD average to the third highest in that group of 38 industrialized economies.

The Biden administration has argued that the damage caused by its tax hikes can be mitigated by having other countries agree to raise their corporate rates to a globally agreed minimum; the OECD calls this Pillar Two of its tax framework. But the proposed OECD rate is just 15% for the largest corporations, while the administration pushes to raise our current 21% rate even higher.

The OECD tax deal would give China an advantage. Blinken’s claim that countries can agree to stop competing to spur growth is Pollyannaish. For starters, regulators and investors have grappled with the books of Chinese companies for years because of widespread accounting fraud. And given the ownership or control of Chinese companies by the government, their corporate taxes are more like change shuffled between pockets.

It gets worse. To attain agreement for Pillar Two, the Biden administration accepted Pillar One, which would take taxes paid by American companies to the U.S. Treasury and transfer the revenue to foreign countries. The administration wants to send taxes from countries where businesses conduct activity to countries where goods and services are consumed. Applied neutrally, the U.S. would be a net winner given our trade deficits. However, the administration agreed to rules that disproportionately target American taxpayers, giving our revenue to other countries and benefiting China at our expense. In contrast, Germany, one of the countries pushing hardest for the OECD pact, boasts that it will gain revenue under Pillar One even though it is a net exporter.

Although these rules only apply to very large companies and China has more global Fortune 500 companies than the U.S., PricewaterhouseCoopers has—shockingly—estimated that U.S. companies would comprise 62% of the tax base, while Chinese companies would comprise only 9%. Economists at Oxford reached similar conclusions. This happens because Pillar One applies only to very high profit margins. Because Chinese companies are run not to generate profits for shareholders, but rather to advance the goals of the Communist Party and generate employment regardless of consequence, they generally don’t post strong profits. And as with Pillar Two, the taxes due are based on very complex company data concerning which we have no reason to trust China.

The Democrats’ proposed tax increases on smaller U.S. companies are even more drastic and dramatic. Some pass-through businesses would see their top rate skyrocket to at least 41.4%, and in some cases to 48.8%, leaving them far fewer resources to expand and hire new workers. This is before state and local taxes, which could raise the rate to 60% in high-tax states. Small businesses are a leading engine of job creation in the United States, and crushing them with taxes won’t help anyone.

In other words, the administration wants to jack up taxes on small- and medium-sized businesses so that Big Tech companies can divert their tax obligations from Washington to foreign countries. So much for making America a great place to invest and hire.

What America needs is massive investments in its manufacturing base and workers’ skills to undergird our industrial plants, pool of high-quality jobs, technological edge, and strategic autonomy—not a dramatic expansion of the welfare state. If Congress passes a multitrillion-dollar tax bill transferring American revenue to China, we’ll have scant capacity left for doing so, as we cannot endlessly tax and borrow.

Unfortunately, the tax proposals will undermine these strategic interests, and the administration’s reliance on unenforceable international accords to counter those effects will only backfire and benefit China. Increasing taxes makes America a less competitive place to do business and hire workers, and cedes strategic revenue interests with nothing to show for it.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Aharon Friedman is former senior adviser for tax policy at the U.S. Treasury, and senior tax counsel and director at Federal Policy Group.

Stephen Miran served as a senior adviser at the U.S. Department of the Treasury in 2020-21 and is a founder of Amberwave Partners, an impact investing firm focused on U.S. jobs, security and growth.

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To contact the reporter on this story: Kelly Phillips Erb in Washington at kerb@bloombergindustry.com