Written by Nick Licata | Originally published on 11/05/2021
What is the Proposed Global Corporate Tax?
In early October, The Organization for Economic Cooperation and Development (OECD), consisting of 136 countries representing more than 90% of global GDP, agreed to levy a global corporate minimum tax rate of 15% on overseas profits from 100 of the world’s largest and most profitable multinational corporations (referred to as MNCs).
In addition, each country would be entitled to share in the revenue generated by the tax, which should raise a total of $150 billion. The increase in funds will allow developing countries to better pay for the effects of the COVID-19 pandemic, although the deal will not take effect until 2023.
The Historical Context of State’s Trying to Control Capital
Throughout history, there has been tension within the state between its governing body and other organizations. The state in its earliest forms can be viewed more as tribes than bureaucracies. Nevertheless, the struggle always came down to control of resources. The resources can take three forms: people’s loyalty, physical elements, or economic activities. Examples of each struggle can be easily illustrated during specific historical periods.
During the medieval ages, it was the state versus the church vying for allegiance; in the 19th century, it was the state versus ethnic entities vying for control of the land. Finally, in our present world, it is the state versus corporations vying for control of capital, i.e., financial wealth. All three conflicts existed and overlapped from the beginning of civilization and continue till the present day. The proposed Global Corporate Tax (GCT) is the current manifestation of the struggle for controlling the flow of capital.
Can a GCT shift the flow of capital from corporations to states?
That’s the plan, but since each country would incorporate the rate and rules of the multinational agreement into its own tax system, the effectiveness of a GCT country could be dramatically limited. For instance, the agreement, as it stands now, eliminates Trump’s Cuts and Jobs Act (TCJA) legislation which allows MNC’s income earned overseas to be brought back to the U.S. tax-free. Instead, that income would be taxed 15 percent under the CGT.
The GCT agreement is designed to discourage nations from tax competition through lower tax rates that erode their tax base. Biden’s U.S. Secretary of the Treasury Janet Yellen called the agreement “a once-in-a-generation accomplishment for economic diplomacy” that will “end the race to the bottom on corporate taxation.” Under the current tax system, MNCs could establish their headquarters in small countries lacking large infrastructures but offering lower tax rates. For example, Ireland’s top corporate tax rate is only 12.5%, whereas it is 21% in the U.S., 19% in the United Kingdom, and averages about 22% in the European Union.
While MNCs can range from a single-family to a network of intertwined legal entities, together, they shape the global market more than ever before. States primarily rely on revenue from a domestic tax base. When their homeland businesses conduct and establish branches in other states, they maximize their untaxed profits by exploiting gaps and mismatches between different countries’ tax systems.
According to Michelle P. Scott of Investopedia, creating a universal CGT gives little or no tax advantage to MNCs shifting profits to lower-tax jurisdictions. Importantly then, countries could compete globally on the relative strength of their infrastructure and skilled workforce. That advantage benefits developed countries. Consequently, it is not surprising that the organization representing the wealthiest countries, the G20, initiated establishing a CGT.
A critically important change in global taxation would be that corporate income from intangible property, like royalties from trademark, patent, and software licenses. They would be taxed where it was earned, even if the MNC didn’t have a nexus (i.e. a physical presence) in that country. Only the largest MNCs, approximately 100 companies, would be subject to the rule permitting countries to tax a corporation without having a nexus to that country.
Must the U.S. Senate ratify a Global Corporate Tax?
In the last 80 years, a succession of presidents has avoided U.S. treaties being confirmed by a two-thirds Senate vote. They have done that by signing treaties through an executive agreement. From 1940-1989, presidents entered into more than 13,000 executive agreements and signed only 800 treaties. The controversial executive agreements stand out, such as when President Franklin D. Roosevelt used an executive agreement in 1933 to extend America’s recognition of the Soviet Union. The 1937 Supreme Court ruled that executive agreements, signed and approved only by the president, have the same legal status as treaties.
Nevertheless, a succeeding president can withdraw from a prior president’s treaty entered into by an executive agreement. For instance, President Barack Obama signed the Paris Agreement as an executive agreement in August 2016 without ratification from the Senate. In 1920 President Donald Trump officially withdrew from the agreement without ratification from the Senate.
Two characteristics of a treaty by executive agreement.
The first is a relatively minor procedural step. A law passed by a Democratic Congress required that the President’s Secretary of State must inform the Senate within 60 days of any executive agreement. With the real possibility of Republican opposition to the agreement, if the Biden administration misses this simple requirement, they will be inviting a needless obstruction.
Second, congress may not disavow an executive agreement, but it has plenary authority to modify or abrogate them regarding domestic law purposes. For instance, it passed legislation allowing American hostages and their families harmed by Iran to proceed with tort claims. It is unclear how this feature could impact the GCT if people, and corporations acting as people, bring suits under domestic laws to hinder the GCT somehow.
Two Alternative Paths Forward
There are two other paths that President Biden could take to get the GCT adopted, a reconciliation bill or a congressional-executive agreement. Both would require a majority vote by both Congressional houses and avoid being blocked by a filibuster in the Senate. However, the reconciliation bill has limits on the subject matter, such as being limited to revenue-related elements of the treaty. Also, reconciliation legislation has limits on how often it can be used. Parliamentarian rulings could come into play as they had in the past when they limited the breadth of Biden legislation.
Unlike the sole executive agreements, one would expect that a new president could not overturn Congressional-executive agreements. However, last year Abigail L. Sia in a Fordham Law Review piece, concluded that “It is neither clear nor well settled whether the president has the constitutional authority to withdraw unilaterally from this type of agreement” [Congressional-executive agreement]. So, even if Biden were to get the majority of both houses to pass the GCT treaty, the next president might unilaterally withdraw from the treaty. And as a result, the nation would once again witness the conservative Supreme Court deciding the extent of presidential executive powers.
GCT could be a game-changer if we had a functional government
The GCT treaty could ignite a public struggle between the state and multinational corporations as to who determines a nation’s foreign policy, which is the ultimate exercise of sovereign power. It is most likely that Biden will choose the sole executive agreement path. The other paths lead to an inevitable rejection by the Senate if the Republicans oppose it.
In the executive agreement scenario, if a Republican becomes president in 2024, we could see the U.S. once again pull out of an international treaty after its executive officer signed off on it. That will reinforce the perception that U.S. foreign policy will be inconsistent for the foreseeable future. It is not just because Republicans and Democrats do not share a common vision for America’s future, which has always been the case. It is because of the excessive weight of private and corporate wealth in electing members to congress.
Corporate influence on congress has always been present, but the accumulation of wealth has led to them accumulating a historically high concentration of economic resources and political influence. Congressional criticism of the GCT will not manifest itself as sympathy for corporations. Instead, it will consist of both arcane stalling tactics and issues, like enforcing the agreement.
For advocates of maintaining the GCT treaty, it will be necessary to raise the question of where national political power to make foreign policy decisions should rest. Should it be with the elected representatives of the public or the corporate bodies which are legally bound to represent the interests of their investors? However, the debate must go one step further because many of those representatives of the public are also indebted to their corporate benefactors.
Consequently, the success of adopting and maintaining a GCT treaty must not rest on the shoulders of just one person, the president. Or even congress for the matter. It must be supported by a national discussion occurring in both red and blue states on what is the proper relationship between corporate wealth and a republican state that can be independent of their wealth’s influence.