Treasury Secretary Janet Yellen Pens Op-Ed in Wall Street Journal

April 7, 2021

Today, in an op-ed to be published in the April 8, 2021, edition of The Wall Street Journal, Secretary Janet L. Yellen called for an end to the global race to the bottom on corporate taxes. This is also a provision of the Made in America Tax Plan, a part of President Biden's American Jobs Plan, that will accelerate American competitiveness.

Read the piece online, available today.

The text of the piece follows:

A Better Corporate Tax for America

By Janet Yellen

When Congress enacted the Tax Cut and Jobs Act of 2017, the result was a dramatic reduction in corporate tax revenue. Over the past three years, corporate tax collections have fallen to their lowest level since World War II: 1% of gross domestic product. Many of the country's largest companies paid no federal taxes in 2020.

Proponents of the TCJA said the U.S. would get something in return for these tax cuts. Lower rates, the argument went, would lure production and investment to our shores, but that hasn't happened-and for an obvious reason: Other countries see what we're doing and respond. When they see us lower our rates, they lower theirs to undercut us. In the end, no nation ends up more competitive. The result is a global race to the bottom: Who can lower their corporate rate further and faster?

The TCJA not only perpetuated this race to the bottom; it also put America at a disadvantage when it came to running it. The law creates an incentive for U.S. companies to offshore their workers and investments-and to shift their profits to tax havens. One reason is the minimum tax on the foreign profits of American multinational corporations. In theory, a minimum tax should stop the flow of business out of a country because firms know they'll be taxed no matter where they go; they can't game the system. But the TCJA's minimum tax was poorly designed.

If you're a U.S. firm that does business abroad, the TCJA essentially gives you an easy-but perverse-choice: You can move your foreign profits and operations to America, where the corporate tax rate is 21%, or you can keep them anywhere else in the world where the U.S. will charge you around half. It's not a hard call, especially because the minimum tax is calculated based on a firm's total global profits rather than looking at what the company earns in each different country. With no one looking at individual jurisdictions, corporations can shift and book profits wherever they can get the lowest tax bill. The TCJA also makes the first 10% of returns earned by foreign assets tax exempt, a powerful incentive for companies to offshore factories and jobs. It isn't an overstatement to say that today, most firms would prefer to earn income anywhere but America

The U.S. isn't the only loser in this race to the bottom. So are our corporations.

The global competition for low rates allows American firms to pay less taxes-or none at all-but they still pay a significant cost. Over the next 10 years, more than $2 trillion of the U.S. corporate tax base will flow out of the country because of the broken system I've described. Our tax revenues are already at their lowest level in generations, and as they continue to drop, the country will have less money to invest in airports, roads, bridges, broadband, job training, and research and development.

Funding for these public goods has been declining for four decades. American infrastructure now ranks 13th in the world. The effect on the competitiveness of U.S. businesses is enormous: The American Society of Civil Engineers projects that over the next two decades deficient infrastructure will cost American exporters $2.4 trillion. (That says nothing of what deficient R&D or education will cost them.)

This is the rock bottom of the race to the bottom: By choosing to compete on taxes, we've neglected to compete on the skill of our workers and the strength of our infrastructure. It's a self-defeating competition, and neither President Biden nor I are interested in participating in it anymore.

We want to change the game.

Last week, the president announced a series of proposals that, collectively, do exactly this: They enter the U.S. into a new, smarter form of competition. America will compete on our ability to produce talented workers, cutting edge research, and state-of-the art infrastructure-not on whether we have lower tax rates than Bermuda or Switzerland.

The Made in America Tax Plan tilts the scales in favor of companies that invest in the U.S. It eliminates the TCJA's profit-shifting and offshoring incentives. The proposal ends the special exclusion on foreign assets. It also establishes a more effective global minimum tax that is much closer to the American rate, and stops calculating it based on total global profits. Instead, the tax will be calculated country-by-country. This way, corporations can't shift profits around the world to minimize their tax bills.

The tax plan not only ends U.S. participation in the race to the bottom, it also gives the whole world an incentive to give up the race. Destructive tax competition will only end when enough major economies stop undercutting one another and agree to a global minimum tax. Through the Organization for Economic Cooperation and Development, we have been engaged in productive negotiations to achieve this, and the new tax proposal also includes some powerful incentives for other nations to sign on. For instance, the plan penalizes foreign multinationals operating in America that try to shift profits to tax havens.

The revenue generated by the tax plan will be turned into a once-in-a-generation investment in U.S. competitiveness. The Biden administration's American Jobs Plan includes funding for both traditional infrastructure (roads, bridges, ports) and the more modern kind needed to run a digital economy (high-speed broadband networks and a clean energy grid). According to Moody's, by 2024 these investments will add an extra 1.6% to GDP, which equates to roughly $400 billion.

America's corporate tax system has long been broken. So too has been the way we think about corporate taxation. Tax reform isn't a zero-sum game, with corporations on one side and government on the other. There are policies that are mutually beneficial, true win-wins. Washington has one in front of it right now.

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