For decades, the story of corporate taxation has been a global race to the bottom. From 1985 to 2018, the average corporate tax rate worldwide dropped from 49 percent to 24 percent. The biggest single jolt came in 2017, when U.S. President Donald Trump signed the Tax Cuts and Jobs Act, slashing the American rate from 35 percent to 21 percent while expanding the amount of foreign income exempted from tax.

Official tax rates are only part of the story. Corporations have made increasing use of exemptions, incentives, and loopholes—especially offshore tax havens, where, worldwide, around 40 percent of their profits now end up. Budgets of the U.S. Internal Revenue Service (IRS) and of other national tax authorities have been slashed, and corporate audits are getting lighter: the U.S. Treasury now estimates that audit rates for large corporations fell from 98 percent in 2010 to 49 percent in 2018. In April, news emerged that at least 55 of the United States’ largest multinationals—including Nike, FedEx, HP, Salesforce, and Booz Allen Hamilton—paid exactly zero U.S. federal corporate income tax in the past financial year. In fact, the 55 companies received a total $3.5 billion in tax rebates.

So it was remarkable when, at the beginning of July, 130 countries representing 90 percent of global GDP agreed to a package of measures designed to move in the opposite direction. The deal, which was facilitated by the Organization for Economic Cooperation and Development (OECD), builds on a framework developed by the G-7 at its June summit. Its most important element was a global minimum corporate tax rate of “at least” 15 percent. The proposal could cut tax havens out of the picture, since it includes a provision whereby multinationals paying below the minimum rate in a given country would see their home countries top up the tax to the minimum rate and take the resulting revenue.

The deal reflects a new, pro-tax mood taking hold in Western capitals. In Washington, President Joe Biden has rolled out his American Jobs Plan, which proposes pushing the corporate tax rate from 21 percent to 28 percent and, perhaps just as important, giving the IRS an $80 billion boost to its budget over the next decade. In London, the British government announced that its own long-running program of corporate tax cuts had failed to stimulate investment as hoped and so the rate would climb back up to 25 percent by 2023—a stunning reversal for the Conservative government.

The long-term prospects for higher taxes on multinationals have never been better. That should come as welcome news not only for those who care about reducing inequality but also for those who want an economy that adds more value to the world. Multinationals have been channeling a rising share of their profits into rewarding shareholders rather than investing for productivity: in just the first quarter of 2021, 500 companies spent over $300 billion in stock buybacks and dividends. Higher corporate taxes would transfer money from unproductive schemes such as those and put it to use on schools, scientific research, green-energy infrastructure, and so on. The result should be healthier economies and societies.


Tax policy, and especially international tax policy, moves like a glacier, inching forward slowly but with enormous momentum. The recent deal is like a sudden crack in the ice that signals a deeper shift in the underlying terrain. In reality, the politics of taxation have been changing for more than a decade.

The 2008 global financial crisis dramatically altered the conversation around taxation. It not only undermined popular faith in politicians and elites but also shattered the consensus favoring low taxes and loose regulations. At a more practical level, the crash generated massive budget deficits, which sent governments scrambling for new sources of tax revenue. Multinational corporations (and rich individuals) were soon identified as promising sources.

Meanwhile, rising concern about inequality and unaccountable monopolies—along with the explosive information revealed in the Panama Papers leaks and other tax evasion scandals—has buttressed a growing “tax justice” movement that has offered detailed solutions to the problems. Taxing the rich, once anathema, is now growing ever more popular, including among Republicans. Even business leaders themselves are getting on board: research in the United Kingdom has found that the tax directors of major multinational corporations back higher taxes on corporations, amid a rising sense of wanting to “do the right thing.”

But the deal on a global minimum corporate tax reflects more than just changes in popular attitudes; it is also the result of a change in the most basic principles underpinning the system of agreed international tax rules. When a multinational from one country invests in another country and earns profits there, which country gets to tax the resulting profits, and how much? The agreed answer for the past century or so has been to consider multinationals as bundles of separate entities of different affiliates in each country. The affiliates trade with one another, supposedly at market prices in arm’s-length transactions—whereby both parties act as if they are independent—and then each country taxes its local entities as it wishes. Over time, however, multinationals have developed shrewd ways of shifting profits into low-tax havens and costs into high-tax countries. A tech giant might park valuable intellectual property in one of its affiliates in a tax haven, an entity that then charges hefty royalties to other affiliates in high-tax countries for the privilege of using that intellectual property. Or it might lend money to another affiliate and charge a high interest rate. For the part of the multinational based in high-tax country, those cross-border royalty or interest payments may be deducted as costs against the tax bill.

Corporations have made increasing use of loopholes—especially offshore tax havens.

Supposedly, an arm’s-length price for the royalties or interest should keep this profit shifting within reasonable limits. But how do you price a complex and unique piece of digital intellectual property or a risk-adjusted interest rate? Often it is whatever the firm’s accountants say it is, and these cross-border payments are often big enough to create the deductions needed to wipe out the tax bill in the high-tax country. The international tax rules also favor rich nations so that the country where the multinational has its headquarters—often the United States—usually ends up getting some tax while the rest get little or nothing.

These international tax rules are overseen by the OECD, the club of rich countries that wrested the role from the UN in an opportunistic power grab in the 1950s. In 2013, the OECD set up the Base Erosion and Profit Shifting Project to patch up the leaky, century-old system. The aim was to get multinationals to pay taxes in line with the genuine economic substance of what they were doing and where. Yet the project has not gone the way the OECD hoped.

For some years, critics have pushed to transform the foundations of international corporate income tax away from the OECD’s system of separate entities trading across borders at arm’s-length prices and toward what is called “formulary apportionment.” Under this approach, versions of which are already used by several U.S. states, a multinational’s entire global profits would be added up, and then slices of that global pie would be apportioned to each country where the multinational does business, using a formula based on economic reality (one that took into account a mix of, say, sales, payroll, and capital investment in each place). Each country would then tax its slice at its own rate. If the multinational had a one-person booking office in Bermuda, only a minuscule slice of its global profits could be allocated there, so Bermuda’s lack of corporate tax would hardly be as damaging to other countries’ coffers as it is now.

A different way of aligning tax payments with economic substance is to impose “digital services taxes,” where taxes are levied and withheld not on profits but as a percentage of sales. As things stand now, if a company has sales of $100 million in Germany this year but records no profit there (perhaps aided by transfer pricing tricks), it pays zero corporate income tax. But a digital services tax of, say, three percent of sales would raise $3 million in tax for the German government, whatever the profit declared.

For a long time, the OECD had steadfastly refused to budge beyond its arm’s-length method or to countenance the other reforms being proposed. But as the efforts to shore up the old system got bogged down in ever more complications and technical squabbles, it began to dawn on the OECD’s technicians that the arm’s-length approach could never be patched up, certainly for the fast-growing digital economy. In 2018, the OECD began to accept the need for a global minimum tax in theory. Then, in January 2019, it conceded publicly for the first time a need for “solutions that go beyond the arm’s length principle.” Weeks later, Christine Lagarde, the head of the International Monetary Fund, endorsed the shift, calling the arm’s-length principle “outdated” and, because it favors countries where multinationals have their headquarters, unfair to developing nations. Also in 2019, France started a trend with a new three percent digital services tax, and now 30 countries and counting are imposing them unilaterally. (Under the new OECD deal, countries are supposed to do away with digital services taxes in exchange for the gains elsewhere, but a date for the change has not been set, and many countries will likely want to hang on to them.)

Taxing the rich, once anathema, is now growing ever more popular.

Even at a rate of just 15 percent, the OECD now estimates that its minimum tax proposal could raise $150­ billion annually. A technically stronger and simpler variant of the global minimum tax called the “minimum effective tax rate” could raise even more money—an estimated $460 billion at a minimum 15 percent, or $780 billion at a 25 percent rate. Under this proposal, authorities would identify the share of each multinational’s global profits that is undertaxed below the agreed minimum rate. Then they would allocate those undertaxed profits to various countries using the formulary apportionment approach and allow each country to tax its share of that global pot at its own rate. Nearly all countries would raise more with this proposal than with the OECD proposals, but lower-income countries would gain especially.

The G-7 and the OECD also agreed to a new, additional approach to taxing the most profitable multinational companies. Above a ten percent margin, 20 to 30 percent of companies’ profits would be divided among countries in proportion to how large their sales were in each jurisdiction and then taxed at whatever rate each country so chose. This is a timid and overly complicated version of formulary apportionment. It would be vastly stronger and simpler, of course, to make 100 percent of all global profits subject to this system, as the minimum effective tax rate proposal would, but the G-7’s proposal is a start. The door to formulary apportionment and global minimum tax rates has been cracked open. The task now is to push.


A more philosophical but equally profound shift is also behind the changing landscape of taxation: an increasingly sensible approach to thinking about what economic competitiveness means for countries. In a 1994 Foreign Affairs article, the economist Paul Krugman skewered some of the woolly thinking on national competitiveness of the type favored at Davos and other jamborees of the global elite. According to this thinking, as mobile capital roams the globe, looking for investment opportunities, nations have no choice but to dangle incentives to attract it. Those lures include lax financial regulation, low wages for workers, strong financial secrecy protections, weak antitrust rules and enforcement, and low corporate tax rates.

The call for this kind of competitiveness sounds sensible, but on closer inspection, it falls apart. For one thing, the supposed competition bears no resemblance to competition between private firms in a market. A company that becomes uncompetitive may fail and disappear, but what is the equivalent for a country? Or what would be the country equivalent of corporate profit or the corporate equivalent of corporate tax revenues? None of it makes any sense.

One can imagine two main routes to something that might be called national competitiveness. One is the type that has dominated for decades: the low-tax, low-regulation, low-wage, low-enforcement race to attract capital, which has been spearheaded by tax havens but followed to some degree by most countries. It inevitably degenerates into a race to the bottom, as countries offer ever bigger subsidies to stay in the race. This “downgrading” approach has been widely road-tested, and it has always been accompanied by rising inequality, stagnant incomes, sluggish growth, increased popular rage, and a surge in transnational organized crime.

But there is a second kind of possible competitiveness that one might call “upgrading.” Following this approach, a government invests in infrastructure, education, or criminal or antitrust enforcement to boost productivity and to select for businesses that will operate in the public interest. Upgrading may improve one’s own productivity, but it is not about beating other countries: instead, everyone wins. If Canada upgrades its education or improves enforcement of its securities laws, for example, that may well make U.S. citizens richer, too, as Canadians who are better educated and suffer less financial fraud consequently become wealthier and buy more U.S. goods.

Fortunately, the competitiveness agenda seems to be falling out of favor. It took a big hit after the global financial crisis, which itself was partly caused by a race to the bottom on financial regulation between New York and London. After a brief comeback under Trump—whose White House boasted that its massive tax cuts would “promote economic competitiveness”—the idea appears to be on the way out. There is growing recognition among economists that neither the Trump tax cuts nor similar efforts from previous eras have delivered prosperity. In fact, the opposite is likely true.

Consider the language of Biden’s American Jobs Plan. In announcing it, U.S. Treasury Secretary Janet Yellen unequivocally endorsed the upgrading approach and rejected the downgrading. “The US will compete on our ability to produce talented workers, cutting edge research & state-of-the-art infrastructure, not on whether we have lower tax rates than Bermuda or Switzerland,” she wrote in April. “It’s a self-defeating competition, and neither President Biden nor I are interested in participating in it anymore.” In the same spirit, the communiqué from G-7’s June summit committed to “reversing a 40-year race to the bottom.”

The global minimum tax deal may not survive. Its technical details still need to be nailed down and approved. Biden must win over Republicans in Congress, who have vowed to shoot it down, calling it “anti-competitive, anti-US, and harmful.” The United Kingdom has threatened to exempt its banks from the rules. Corporate tax havens such as Ireland and Luxembourg hate it. But regardless of the fate of this particular bargain, it is a sign of broader subterranean shifts that go far beyond corporate tax and that will prove nearly impossible to stop. Multinationals have been paying too little for too long, free-riding on the public goods paid for by everyone else. One way or another, in the years to come, they will likely contribute a lot more.

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