What economists hailed as the most ambitious tax overhaul in a century is now mired in a toxic mix of fine print and political paralysis.
It was only last fall that more than 130 nations signed on to an agreement to eliminate the world’s tax havens and enact a global minimum tax. The agreement was designed to increase taxes substantially on many large corporations and to end an international fight over how technology companies are taxed. Its architects said it would end the global “race to the bottom” for corporate tax rates.
But legislators in both the U.S. and Europe are now struggling to pass the laws needed to make good on the promises embedded in the deal. And no tax changes are likely to pass on their own, without the more politically popular spending programs also passing.
In the U.S., the central problem is that Senate Democrats cannot agree on the spending proposals — on energy, drug prices and other issues — that would accompany the tax changes. Republicans are not opposed to all of the tax provisions, but they show little sign of voting for any bill. As a result, every Senate Democrat needs to agree to the bill in order to get it passed.
In Europe, after years in which Ireland resisted tax agreements to protect its status as a haven, Irish leaders have come around. But a different obstacle has now emerged: Poland. Polish officials have expressed technical concerns, but officials elsewhere in Europe and in the U.S. believe that Poland is actually seeking leverage in a dispute with the E.U. over pandemic aid money.
If both the United States and Europe cannot manage to comply with the agreement, the global deal is likely to unravel. That would mean a continuation of a hodgepodge of tax rates and related tariff fights around the world.
Policymakers who have been hashing out the deal want to avoid that outcome. “Going back and starting all over again would pose policy risks for countries and even greater competitiveness risks for companies, and I think it’s in all of our interests to avoid that,” Paschal Donohoe, Ireland’s finance minister, said in an interview in Washington.
The agreement had two prongs, or “pillars,” as the negotiators say. First, countries are supposed to enact a 15 percent minimum tax so that companies pay a rate of at least that much on their global profits no matter where they set up shop.
With that minimum in place, there would be less reason for companies to flee to countries with rock-bottom rates and less pressure on nations to slash their tax rates to attract foreign investment. As it stands, this race to the bottom has deprived governments of tax revenue that they need to invest in infrastructure and social safety nets.
Second, the deal would allow governments to tax the world’s largest and most profitable firms by where their goods and services are sold instead of by where they are based.
The current system of taxing companies based on the location of their operations has created multiple problems. It has led companies to claim that a large share of their operations is in low-tax places like Ireland and Bermuda. And it has led to a fight between the U.S. and European countries that have imposed special taxes on American technology giants such as Google and Facebook, which operate all over the world even if they don’t have a physical presence in every country.
The global tax pact includes a compromise that would put that fight to rest. The deal would also allow countries to impose additional taxes on about 100 of the world’s largest companies, based on where they make their sales.
But before any of that happens, there is more persuasion to be done.
On a weeklong trip to Europe in May, Treasury Secretary Janet Yellen made Warsaw her first stop in hopes that she could convince Poland not to scupper the entire agreement. At the end of the trip, her optimism was cautious.
“I think it is not hopeless,” Yellen said of getting Poland on board. “It is certainly possible that will happen.”
The bigger hurdle may be the U.S. itself. Today, Yellen will testify before the Senate Finance Committee about the president’s latest budget, and she is expected to be peppered with questions about the fate of the tax deal. Senate Democrats say they are still hoping to pass a bill by September that includes a mix of spending programs and tax changes.
The Treasury Department said on Tuesday that it believes things are still moving in the right direction.
“The United States continues to work closely with Poland and our European partners to ensure progress is made on both sides of the Atlantic in implementing this historic deal,” said Julia Krieger, a Treasury spokeswoman, who noted that the European Commission recently approved a pandemic recovery fund plan for Poland. “On the domestic front, conversations on a reconciliation bill continue to be productive.”
Related: The Senate’s continued inaction would have major costs for the climate, David Wallace-Wells writes for Times Opinion. One of them: Tens of thousands of Americans would die needlessly because of air pollution.
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