US Must Adopt Global Minimum Tax to Fight Corporate Tax Avoidance

The Tax Cuts and Jobs Act of 2017 was billed as a transformative reform to the tax code, but promises of spurred investment, job creation, and economic growth have largely failed to materialize.

What has materialized in the years after this landmark change to the tax code is widespread and institutionalized corporate tax avoidance. Loopholes have transformed into major liabilities. To address this serious problem, Congress must implement a global minimum tax to patch the holes and create a more permanent, comprehensive solution.

President Joe Biden’s budget proposal announced yesterday is a step in the right direction. It recommends adoption of a global minimum tax to ensure “all multinationals pay at least a 21% minimum rate on their earnings in each jurisdiction, thereby stopping the race to the bottom on corporate tax rates and leveling the playing field for U.S. businesses.”

An analysis last month from the Institution on Taxation and Economic Policy, drawing from 10-K filings, highlights how 342 of the most profitable corporations found their way to paying an average effective tax rate of 14.1%—significantly below the already reduced rate of 21%.

The TCJA wasn’t savvy tax policy that spurred domestic investment and growth; it was a corporate handout of the highest order.

With the Biden administration’s current corporate tax policies in limbo and the presidential election on the horizon, revisiting advocacy for a global minimum tax becomes a timely policy initiative. It’s also an imperative to maintain the legitimacy of the corporate tax framework. The political will to enact these solutions must be amplified to ensure corporate tax reform has a place on the ballot.

Transparent Solution

The ITEP analysis is sourced from data directly provided by corporations to the Securities and Exchange Commission for purposes of transparency on behalf of investors. However, it underscores the extent that any policy reform toward equitable corporate taxation relies on tax transparency—disclosing effective tax rate directly and in clear terms.

Any high-level policy solution to corporate tax avoidance will need corresponding disclosure requirements. Standardized disclosure formats should be the first order of business, with specific line items for taxes paid across different tax jurisdictions and standardized effective tax rate calculations.

Requiring companies to disclose the value and nature of tax benefits and credits received across all jurisdictions would provide greater insight into the tax strategies they’re pursuing. This would help both tax authorities and the public—everyone from investors and analysts to journalists and interested taxpayers.

Those parties would be able to identify companies that use tax havens with lower tax rates for profit shifting-purposes—or other tax avoidance practices—without having to infer them from filings aimed at an audience of investors.

Interested parties would also be able to examine a corporation’s global tax footprint directly. They wouldn’t need to decipher it from other disclosures.

While addressing individual loopholes, avoidance strategies, and tax havens is crucial, it quickly becomes akin to repairing a leaking roof by waterproofing the ceiling. The TCJA may have accelerated the pursuit of corporate tax avoidance, but it didn’t create the problem.

Global Tax

The US hasn’t signed on to the G20 and OECD initiative for a global minimum tax of 15%—signed in 2021 by more than 140 countries of Pillar Two.

The US doesn’t get tax revenue benefits from other countries’ opt-in. And the domestic budget is left on the outside looking in, while lost revenue could be used to invest in crucial areas such as infrastructure, health care, and education.

Arguments against the global minimum tax focus on concerns such as potential deleterious effects on job creation and foreign investment. But in the presence of widespread adoption of the tax, these concerns come up short.

This needn’t be a partisan issue. US companies are already paying more in taxes to those jurisdictions that have signed on to the 15% global minimum. The US simply isn’t getting in on the action.

Furthermore, a global minimum tax could yield compliance and administration savings by discouraging harmful competition between firms and countries. As it stands, the presence of two major poles of corporate tax compliance creates the need for increased complexity and compliance costs for multinational corporations operating in both sets of jurisdictions.

The political pressure must be turned up on Congress and public officials who would stand in the way. Absent radical intervention, ad-hoc tax policy initiatives won’t be sufficient to offset the revenue harm done by the TCJA.

TCJA Realities

Proponents of the TCJA predicted substantial revenue growth that would offset the revenue losses inherent in the corporate tax rate cut. In reality, best estimates put the resulting budget impact at between a $1 trillion and $2 trillion loss over its first decade as law.

Many of the TCJA’s cuts to personal income tax will expire at the end of 2025 absent extension, blunting the long-term effects to the federal budget. This may turn down the pressure to adopt a global minimum tax, but it shouldn’t. The corporate tax system will remain permanently altered.

The current system, riddled with loopholes that facilitate widespread tax avoidance, erodes public trust and harms the nation’s ability to compete globally and invest in the future. Implementing a global minimum tax offers a solution that promotes fairness and equity, and prevents domestic policy from being tied up in corporate tax avoidance whack-a-mole—closing one loophole just to open another.

Andrew Leahey is 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

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