Op-ed: Historic international tax agreement at the G-20 will eliminate destructive race to the bottom

Jacob J. Lew
President of the European Commission Ursula von der Leyen looks on as U.S. President Joe Biden gestures towards Turkish President Recep Tayyip Erdogan and French President Emmanuel Macron greets Director-General of the World Trade Organization (WTO), Ngozi Okonjo-Iweala, at the start of the G-20 Summit at the convention center of La Nuvola, in Rome on October 30, 2021.
Ludovic Marin/Pool via Reuters

This weekend, leaders of the G-20 joined 136 nations in total in endorsing an international tax agreement to make the global economy more fair and more productive. This historic deal will increase incentives to invest in workers and workplaces and ensure that large and profitable corporations do not escape taxation. Further, it demonstrates the power of diplomacy to enhance U.S. leadership around the world.

Secretary Janet Yellen and the Treasury Department negotiated an end to the global race to the bottom on corporate taxation by establishing a global minimum tax on foreign earnings. Over four decades one country after another, including the United States, played a self-defeating game of trying to win the race by claiming the lowest tax rate to attract and retain businesses, only to see other nations quickly follow suit.

Countries would slash their corporate rates, creating tax havens that permitted some of the most profitable businesses in the world to escape paying taxes at home, damaging the tax base in both the home country and the tax home. Even though all countries would have been better off cooperating to ensure a minimum level of taxation, acting individually they arrived at a situation in which all countries are worse off.

That is the definition of a race to the bottom, and in a race to the bottom, there are no winners. Rather than grow more competitive, the United States saw its tax base erode. Corporate tax collections following the 2017 Tax Cuts and Jobs Act fell to their lowest level since World War II: just 1% of gross domestic product. This left our country unable to invest in the core ingredients of economic growth: infrastructure, education, childcare and research and development.

This destructive race ends now. A new global minimum tax of at least 15% leaves no incentive for nations to undercut each other by slashing rates and no ability to do so because of strong enforcement rules. Instead, nations will compete on aspects of economic strength that will undergird growth for decades to come: Are the nation's workers educated and skilled? Are their supply chains efficient and modern? With a level playing field, the United States will be more competitive, and all nations will be pressed to compete on terms that lead to more productivity and growth. And no longer will U.S. businesses be the only companies subject to a minimum tax on foreign earnings.

The deal also marks a significant diplomatic achievement. It is a major step towards reviving U.S. leadership on the international stage. Close and constant consultations on this agreement signaled to partners and allies that a page had turned on a recent period of unpredictable unilateralism. Instead, the Administration embraced multilateral leadership to strengthen the global economy while serving the interests of working American families.

Rarely do 136 nations agree on anything, let alone a topic as complex and controversial as international corporate taxation. It is an encouraging example of cooperation among the world's economies that offers hope for tackling the other transnational challenges we face, from climate change to ending the pandemic. These issues cannot be addressed without deep multilateral engagement. But, if we can achieve this level of unanimity on something as complicated as international taxation, there is reason for optimism on other seemingly intractable issues.

While the completion of the international tax agreement is a landmark achievement, neither Secretary Yellen nor other leaders have the luxury of a victory lap, even if they deserve one. There remains far too much to do, and the stakes have never been higher.

Leadership on the global stage is only lasting if action follows negotiations. Most crucially, Congress must move quickly to implement the agreement on the global minimum tax in the upcoming reconciliation bill so that this landmark foreign policy achievement, and the investments it will support, can begin to flow to the middle-class Americans who stand to benefit.

Jacob J. Lew served as U.S. Treasury Secretary from 2013 to 2017.