A global tax system is good for the United States

The US system for taxing international corporate income has long been dysfunctional. It is unnecessarily complex and distorts business decisions while not generating much revenue, thus forcing higher taxes elsewhere to make up the difference. Policy makers have the best chance in generations to reform and improve this system while engaging the rest of the world. Treasury Secretary Janet Yellen has already helped shape an international agreement signed by more than 130 countries. Congress must now do its part and lock it down.

The two approaches to international taxation are global taxation, in which a company’s home country taxes all of its worldwide income, and territorial taxation, in which income is taxed only by the country where he is won. Neither system is perfect and both inevitably create distortions.

A global system can hinder the competitiveness of American companies by increasing their costs relative to those of competitors legally domiciled in other countries. A territorial system, on the other hand, creates an incentive to localize production and transfer declared profits abroad.

Prior to 2017, the United States followed a third approach that combined some of the worst features of both, which I call a “dumb territorial” tax system. It purported to tax U.S. corporations on their worldwide foreign income, but in practice offered them a tremendous opportunity to defer those taxes permanently, effectively allowing them to create a territorial system for themselves while leading to massive accumulation of foreign income. .

President Trump and the Republican Congress reformed that system, replacing it with a hybrid system that included a minimum tax called Global Intangible Low-Taxed Income, or Gilti, for businesses that earned a high rate of return and also paid low taxes. abroad. This plan took a few steps towards a more rational system, recognizing the need for a compromise between global and territorial. But he also took a few steps back on rates and technicalities, such as allowing companies to apply the minimum tax based on their global average rate rather than on a country-by-country basis.

The case for consolidating and correcting Mr Trump’s reforms was already strong, but the global deal secured by Mrs Yellen makes it much stronger. In particular, the global agreement removes the main objection to more aggressive taxation of foreign income, as other countries have all agreed to adopt similar systems. Fears that US companies will be less competitive or try to avoid US taxes by incorporating overseas are considerably less than they would otherwise be.

Conversely, the risks of inaction have increased. The Global Minimum Tax Agreement includes an Undertaxed Payments/Profits Rule, or UTPR. This mechanism would allow any country to enforce the agreement against companies headquartered in countries without minimum tax legislation. In other words, if the United States leaves the agreement, American companies could find themselves at a disadvantage. Even without this enforcement mechanism, no deal would risk replacing the recent spirit of cooperation with messy tax and trade wars.

Last year, the House passed a series of international tax reforms that are a good starting point for continued consideration by Congress. As a large economy, the United States has the opportunity to go slightly beyond the international agreement with relatively little downside. Some provisions should be updated to better match the global agreement, in particular the one that implements the undertaxed payments rule.

The Global Minimum Tax Agreement marks the dawn of a new era of international economic cooperation. It will be good for the countries concerned and may even be popular. It is pragmatic and, if necessary, relatively minimal by establishing only a floor rate of 15%. If Congress doesn’t pass legislation to enforce it in the United States, we could end up with something even worse than the stupid territorial system we had before President Trump.

Furman, a professor of economic policy practice at Harvard University, served as chairman of the White House Council of Economic Advisers from 2013 to 2017.

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