The Biden administration has taken office at an extremely difficult time. The U.S. economy continues to struggle with the massive disruptions of the COVID-19 pandemic. And in response, Congress is busily debating another relief package.
Lost in this COVID-inflicted carnage, however, is a potentially significant economic schism with Europe. Major European governments are currently threatening to impose hefty new corporate taxes on America’s large tech companies—the so-called “GAFA Group” of Google
The European Union countries have a legitimate point since these tech giants continue to earn record global profits yet pay little in the way of corporate taxes. It’s a challenge facing Washington as well—that global multinationals are still using tax havens to hide massive profits. It’s actually a shared concern among many nations, which is why the EU’s plan to impose unilateral penalties on U.S. firms is a poor solution.
The Coalition for a Prosperous America (CPA) recently reported that America’s 500 largest public companies paid a mere 8.7% average federal tax rate on their profits in 2019. According to CPA, fully taxing these global companies would have yielded an additional $97.8 billion for the U.S. Treasury.
To avoid a trade war, Europe should agree to a quid pro quo—target not just digital companies but all of the multinationals that keep evading corporate taxes.
Both Washington and Europe should be frustrated that large multinationals keep skirting their tax obligations. And new Treasury Secretary Janet Yellen acknowledged as much recently during her Senate confirmation hearings and in phone calls with her European counterparts. Yellen pledged to work with Europe on “efficiently and equitably taxing the income of multinational firms.”
That should be encouraging to the EU. But Yellen also made clear that she expects a fair deal—that the U.S. shouldn’t limit any international tax agreement to just digital companies. Yellen expects the EU to also confront the tax avoidance practiced by Europe’s own favored industries. But right now, the EU is still threatening to move ahead with Digital Service Taxes (DSTs) on America’s multinational tech companies. That sets up a looming confrontation for President Joe Biden.
Essentially, France and others want a somewhat self-serving deal. France wants to not only tax an industry that is predominantly American-owned, but they are currently taxing the gross revenues of these companies—not just the profits.
There’s bipartisan consensus in Congress that if European countries impose DSTs in such a manner, there must be a U.S. response. To avoid a trade war, Europe should agree to a quid pro quo—target not just digital companies but all of the multinationals that keep evading corporate taxes.
In the bigger picture, the GAFA companies aren’t the only ones getting away with financial shenanigans by shifting profits to low-tax countries. In general, the Organization for Economic Cooperation and Development (OECD) already recognizes this as a widespread problem.
But although the OECD has now waded into the issue, its current answer would still primarily disadvantage U.S. multinationals. And that would leave many European and other foreign-owned multinationals able to keep shifting their profits to tax havens.
Level the playing field
The answer is to level the playing field globally. The United States could agree to tax digital companies’ profits if Europe would allow taxes on their own multinationals in the same manner.
The Biden administration has started to negotiate along these lines, and Yellen clearly wants any agreement to move beyond just digital companies. Congress has made its position clear as well. However, if Europe remains firmly committed to unilaterally taxing America’s digital companies, the Biden administration must protect U.S. domestic interests and respond in kind.
The answer is clear for Biden. Just as his ‘Build Back Better’ plan aims to strengthen America’s domestic manufacturers, he should push for tax policies that fully tax all multinational competitors. That’s the only realistic means to level the playing field for domestic American companies. It’s in the interest of the rest of the world as well.
And so, no matter where a corporation is based, it should pay the full tax rate on profits earned in America’s generous consumer market. It’s a sensible approach—and the most equitable in a time of ongoing economic challenges.
David Morse is tax policy director at the Coalition for a Prosperous America Education Fund. Follow him on Twitter @CentristinIdaho.