A triumph of Detroit over Davos

November 3rd, 2021

The leaders of the Group of 20 nations, representing the largest economies in the world, gathered Saturday to announce agreement on a deal that will create a more worker-centered global economy.

This agreement is arguably the most significant international economic pact of the 21st century so far. It is built around a profoundly important principle: Countries should cooperate to raise corporate taxation, not compete to reduce it. At a time of much cynicism about government, this agreement is a triumph of American leadership, for Treasury Secretary Janet L. Yellen and her colleagues. It also demonstrates the power of ideas to shape economic policy, as tax scholars have for years been pondering the conundrums of taxing global companies.

For too long, governments have been complicit in the light tax burdens of their companies, competing in a race to the bottom that has steadily lowered corporate tax rates. This competition to lighten tax burdens on mobile capital has occurred amid trends of rising inequality, rising corporate profits and a rising share of capital income (relative to labor income) in national income.

This agreement ends that race to the bottom. Under the deal, countries representing nearly 95 percent of world GDP agree to tax their multinational companies’ foreign income at a rate of 15 percent. Fifteen percent is a floor, not a ceiling. Countries can of course go higher, but they can no longer lure mobile capital with rock-bottom tax rates.

Countries that choose to stay out of the agreement will face consequences: Their own multinational companies will lose the ability to fully deduct expenses when they operate in countries that have joined the agreement. This strong backstop strengthens the incentives to join the regime and can eliminate the advantages of not doing so.

This new global minimum tax is a triumph of Detroit over Davos. Countries have come together to make sure that the global economy can create widely shared prosperity, rather than lower tax burdens for those at the top. By providing a more durable and robust revenue base, the new minimum tax will help pay for the sorts of public investments that are fundamental to economic success in all countries.

A stronger tax base is central to American prosperity. What determines U.S. competitiveness is not whether we can lower our tax rates faster than other nations, but rather the strength of our fundamentals: the talents and skills of our workforce, the modernity and durability of our infrastructure, and the stability and trustworthiness of our institutions. We need to make important public investments in broadband Internet access, roads and bridges, basic research, climate change mitigation and education, from prekindergarten through the university level.

Workers around the world will also be better off because this historic achievement enables tax burdens to be placed on those most able to pay. For too long, mobile multinational corporations have used accounting gimmicks and clever legal arrangements to avoid taxes, benefiting their shareholders while shifting tax burdens to others.

The Joint Committee on Taxation, an arm of Congress, found that U.S. multinational companies paid an average tax rate of only 7.8 percent on their worldwide income after the 2017 Tax Cuts and Jobs Act, while our top trading partners levied an average rate of 18 percent. At the same time that companies avoid taxes, important public priorities go unfunded.

Workers have received many benefits from a more open world economy, including lower prices on consumer goods and opportunities to serve new markets for those in export industries. But they have also faced many adverse side effects from globalization. Economic disruptions associated with trade and technological change have been particularly damaging to local economies in many states, and some workers feel wronged by a global economic system where the rules are designed to protect the interests of shareholders but not those of typical Americans.

As a consequence, harmful nationalist economic policies, both here and abroad, have looked more attractive than they are. When countries engage in trade wars, consumers suffer from higher prices, companies and workers face business disruption, and the goodwill that is needed to solve global problems through collective action is hard to find. So this agreement couldn’t come at a better time.

In short, the agreement helps nations forge tax systems that are fit for purpose in the 21st century. It is also a template for much more that needs to be done to tackle the adverse side effects of our modern, global capitalism. Continued bold action will be needed to address other international challenges, including vexing problems of public health, as well as the existential threat of climate change. But Saturday’s agreement is a really good start.