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

Ursula von der Leyen, President of the European Commission, watches as Joe Biden gestures toward Turkish President Recep Takyip Erdogan. French President Emmanuel Macron greets Ngozi Okonjo Iweala (Director-General of WTO), at the G-20 Summit in Rome's convention center La Nuvola on October 30, 2021.
Leaders of the G-20 joined 136 countries to endorse an international tax agreement that will make the world's economy more equitable and more productive. This historic agreement will encourage workers to invest and increase productivity. It will also ensure that big and successful corporations are not exempt from tax. It also demonstrates America's diplomatic power to improve its leadership in the world.

Secretary Janet Yellen, along with the Treasury Department, negotiated an end of the global race for the bottom in corporate taxation. They established a global minimum tax on international earnings. Over the past four decades, each country, including the United States played a self-destructive game by trying to win the race to claim the lowest rate of tax to attract and retain business, only for other countries to quickly follow their lead.

Countries would reduce their corporate rates. This created tax havens which allowed some of the wealthiest businesses to avoid paying taxes in their home countries. This could damage the tax base in both the tax home and the home country. Although all countries would have been better to cooperate in order to ensure the lowest taxation, they each created a worse situation by acting alone.

This is what defines a race towards the bottom. There are no losers in a race toward the bottom. The United States' tax base declined rather than becoming more competitive. After the 2017 Tax Cuts and Jobs Act, corporate tax collections fell to 1% of their gross domestic product. Our country was unable to invest in its core components of economic growth, such as infrastructure, education and childcare, and research and development.

This vicious race must end. The new global minimum tax, which is at least 15%, does not encourage nations to cut rates or undercut one another. Strong enforcement rules make it impossible. The nations will instead compete on the aspects of economic strength that will support growth for decades to follow: Are their workers skilled and educated? Are their supply chains modern and efficient? The United States will have a more competitive market and will be forced to compete with other countries on terms that will lead to greater productivity and growth. U.S. companies will no longer be the only ones subject to a minimum foreign earnings tax.

This deal is also a major diplomatic accomplishment. This agreement is a significant step in restoring U.S. leadership at the international stage. Allies and partners were notified by the close and continuous consultations regarding this agreement that an end had been drawn to a period of unpredictability and unilateralism. Instead, the Administration adopted multilateral leadership to improve the global economy and serve the interests of American working families.

Rarely does a group of 136 countries agree on anything. This is a positive example of cooperation between the world's nations that gives hope for other transnational problems, such as climate change and ending the pandemic. These issues can't be solved without multilateral involvement. However, this level of agreement on complex issues like international taxation is a sign that we can be optimistic about other seemingly difficult problems.

Although the international tax agreement was a significant achievement, Secretary Yellen and other leaders don't have the luxury to take a victory lap even if it is deserved. There is still much more to be done, and the stakes are higher than ever.

Only if there is action, can leadership be sustained on the international stage. The most important thing is that Congress act quickly to implement the agreement regarding the global minimum tax in its upcoming reconciliation bill. This will allow this historic foreign policy achievement and the investments it will support to begin flowing to the middle-class Americans who stand the greatest chance of benefitting.

From 2013 to 2017, Jacob J. Lew was the U.S. Treasury Secretary