June 5’s ballyhooed G7 ‘agreement’ to a 15% minimum corporate tax really is nothing of the sort. Today’s G7 ministers’ “commitment” - the actual word used, and thus not an agreement - is an airy-fairy expression of intent by ministers with no ability to bind their governments or legislatures. Today, we think the US Congress likely doesn’t agree, as detailed below.
- Today’s “commitment" has to negotiate so many hurdles over such a long period of time that any immediate market impact should be incremental at most. Markets are used to seeing these sorts of hopeful multilateral announcements dissolve as governmental gears grind, and this is likely to be no different.
- But, today’s G7 ministerial announcement might weigh negatively upon markets a bit at the beginning of the week, largely due to misunderstanding of this G7 “commitment” fomented over the weekend by economists and pundits already eagerly highlighting their own policy preferences and currying favor with Biden policymakers.
- This “commitment" almost certainly won’t affect US companies in the short to medium term (at least through end CY 2021), and perhaps never in the US.
To underscore the obvious: the US Congress passes laws, not Treasury Secretary Yellen. Today we’re bearish on Congress agreeing with it: we’d give the likelihood of Congress agreeing to impose today’s G7 “commitment" as about 40% at most.
- The only reason our odds are even that high is because it’s been suggested by Biden in the ongoing infrastructure negotiations, which we continue to think are about 60% likely to yield success.
- Biden’s inclusion of the 15% minimum as a pay-for in negotiations will continue to be much discussed, but won’t itself make or sink an infrastructure deal.
- Biden doesn’t have the political capital or muscle to make the G7 “commitment” happen in Congress. Biden’s Democratic Party is split between high-tax progressives - who criticize him despite ladling out billions for years to come to their ‘blue’ states in the Covid bill - and centrists who make up the tiny and evanescent Democratic congressional majority. Plus, Republicans have no incentive to help him implement an international commitment to increase corporate US taxes during an economic recovery.
- Yellen now is viewed in Washington as a Biden apparatchik, not as an independent policy voice, and so has no political capital of her own to help get it through.
- Between Republicans and centrist Democrats fighting for their political lives in 2022, there’s not likely to be a congressional majority for it.
Finally, the US policy would have to be worked out in detail over weeks and months, whether as part of infrastructure or other legislation. There’s not even agreement on what sort of tax boost might happen in the US. As the Tax Foundation pointed out this week, there’s not a good understanding of the differences between book and taxable income, or the revenue or policy consequences: https://taxfoundation.org/corporations-zero-corporate-tax/
Peek under the hood, and the ephemeral nature of today's “commitment” becomes clear. The Wall Street Journal describes the rocky and far from assured path forward: "There are still significant details to be worked out, and the deal isn’t sufficient to see the new rules applied globally. For that to happen, it would need support from the Group of 20 leading economies—which includes China and India, among other developing economies—as well as the backing of the 135 countries that have been negotiating the new rules as part of what is known as the Inclusive Framework.”
Finally, there’s still the Ireland lower tax “problem” - and we continue to think as Ireland goes, so goes today’s “commitment”, agreement, or whatever other wonderful word will be applied by spinners in government or the economic punditocracy.
That’s all for now - many thanks for reading. More as it’s warranted.
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