Higher Corporate Taxes Are Needed for Investing in Economy, Janet Yellen Says in Post-Budget Hearing

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Higher Corporate Taxes Are Needed for Investing in Economy, Janet Yellen Says in Post-Budget Hearing
Treasury Secretary Janet Yellen delivers remarks in Washington, on Feb. 9, 2023. (Leah Millis/Reuters)
Andrew Moran
3/10/2023
Updated:
3/10/2023
0:00

Raising the U.S. corporate tax rates is crucial for investing in the national economy and ensuring that the country is competitive in a global marketplace, Treasury Secretary Janet Yellen told Congress one day after the White House released its budget.

President Joe Biden unveiled the fiscal year 2024 budget on Thursday, proposing a 28 percent corporate tax rate, up from the current 21 percent. The administration estimates that it would generate $1.326 trillion in revenues.

If enacted, the United States would have one of the highest corporate tax rates among advanced economies, only behind Japan (30.62 percent), Australia (30 percent), and Germany (30 percent). It would also be higher than China’s 25 percent level.

When asked by Rep. Brad Wenstrup (R-Ohio) how this facilitates America’s competitiveness and resolves the nation’s supply-chain challenges, Yellen noted that a higher corporate tax rate could allow the federal government to make investments critical to the country’s productivity.

“I believe it really is important that we invest in America, so we can be a competitive economy,” she said during the House Ways and Means Committee on Friday. “When I use the term modern supply-side economics, there are quite a few other kinds of investments that are relevant to our productivity and competitiveness.”

In her opening remarks, Yellen emphasized the importance of requiring corporations and the wealthiest Americans “to pay their fair share,” asserting that these tax proposals will “raise crucial revenue for essential investments to boost our long-term growth potential.”

Despite the proposal targeting corporations, economic research indicates that workers usually pay between 75 percent and 100 percent of the cost of corporate tax hikes due to lower wages.
“Lower wages are the result of less investment and slower productivity growth,” the Cato Institute noted.

Ending the ‘Race to the Bottom’

In July 2022, Yellen signed up the United States for the 137-nation Organization for Economic Cooperation and Development (OECD) agreement to establish a global minimum corporate tax rate of 15 percent, celebrating the plan as a way to end the “race to the bottom” in corporate taxation by abolishing tax havens.

But the international scheme has come under fire from critics who say this pact places the United States at a disadvantage in worldwide competitiveness.

House Republicans have alluded to the qualified domestic minimum top-up taxes (QDMTT). This component could allow countries to slash their corporate tax rates to attract entities earning below the threshold of $812 million in revenues and preventing agreement partners from collecting top-up tax on businesses earning above that level.

The Republicans on the committee also expressed concern about U.S. companies paying a higher tax rate on overseas income than other countries as part of the 2021 OECD agreement.

As part of his fiscal year 2024 budget, Biden proposed increasing the present global intangible low-taxed income (GILTI) from 10.5 percent to 21 percent. This would threaten American competitiveness on the world stage, said Rep. Ron Estes (R-Kan.).

“That’s going to make American businesses less competitive,” he told Yellen. “It’s going to actually allow other countries to still race to the bottom of this process.”

The former head of the Federal Reserve rejected this charge, arguing that other countries are adopting similar rates, including the United Kingdom, Japan, and Singapore. Yellen added that the plan ensures states that did not have any tax at all would install a levy.

“We’re a competitive, attractive place to do business, and having a lower tax rate on the earnings of American companies abroad than they would pay at home is an incentive to ship jobs out of the United States abroad,” she said. “And we’re more competitive, and we’re narrowing that gap which makes it more attractive to invest in right now.”

Tyler Goodspeed, the former White House Council of Economic Advisers in the Trump administration, posited that a global minimum tax would foster greater complexity and compliance costs without “achieving their objective of ending tax competition.”

“Lower tax rates and higher revenues in tax havens, and the risk of tit-for-tat retaliation over treaty violations—if that’s not a race to the bottom, it’s certainly not a race to the top,” Goodspeed, a fellow at the Hoover Institution at Stanford University, wrote in an op-ed in The Wall Street Journal last month.

The current OECD plan is scheduled for a 2024 rollout. However, financial experts say that plenty of roadblocks need to be overcome across the globe, such as countries that still need to install the global tax into national law.

Any reluctance in the United States could also throw a wrench into plans on the world stage, says Fisher Investments.

“Now, with Republicans in the House, few see the U.S. adopting the measure anytime soon, which may rekindle objections in other nations worried America wasn’t going to advance it originally,” an independent money management firm wrote in a report.
According to the Tax Foundation, U.S. companies could face “a confusing web of minimum taxes,” such as the GILTI, the new corporate alternative minimum tax from the Inflation Reduction Act, and the base erosion and anti-abuse tax.