- US Treasury Secretary Janet Yellen looks towards international cooperation in finance, a departure from her predecessor
- The global community looks to overhaul its current “race-to-the-bottom” tax system
- Secretary Yellen must now convince G20 powers, including multiple tax havens
Why is Janet Yellen’s heat level Hot?
Answer: Secretary Yellen has secured support for her biggest goal: An international agreement on a Global Minimum Corporate Tax
Last month, United States Treasury Secretary Janet Yellen secured an agreement with other G7 finance ministers on a 15% Global Minimum Corporate Tax (GMCT). This policy, for which Yellen declared support in April, would overhaul the global tax system and, according to Yellen, end the “30-year race to the bottom“ in global taxation. After the summit, she released an op-ed with the German, Indonesian, Mexican, and South African finance ministers in support of the GMCT; representing a wide portfolio of countries and range of economies. Together with these nations, Yellen has gathered support from nearly half of the global economy for this proposal, a significant achievement.
In choosing to fight tax havens, Yellen is taking on what she sees as a fatal flaw in the global economy. Currently, governments lose 500 to 600 billion dollars in tax revenue a year to tax havens, countries with low taxes into which companies shift headquarters and individuals store money. Developing countries specifically lose nearly 200 billion dollars a year as the developing-world elite stashes their money in European finance centers. To Yellen, tax evasion serves as a problem not only for finance ministers looking for money, but for the global middle and lower classes in desperate need for expanded social programs.
In addition to bolstering Yellen’s reputation abroad, this agreement serves as a significant step forward for Secretary Yellen’s, and the Biden administration’s, domestic popularity. This GMCT of 15% will bring significantly more tax revenue back to the United States to pay for Yellen and Biden’s economic recovery and expansion plans. Measures to fight corporate tax havens abroad carry nearly unanimous support in domestic public opinion as many are fed up from losing hundreds of billions of dollars in taxable income.
This deal comes at a critical moment for governments worldwide. COVID-19 has dried up revenue and required massive spending, leaving governments searching for a new source of funding. By targeting tax havens, governments aim to have more tools in their toolkits to respond to the economic crisis at hand. To Yellen, this need has created a common interest for countries to work together to find revenue, a perfect situation to write a global agreement.
Who is changing Yellen’s heat level?
Answer: Yellen’s counterparts in the G20 are raising her temperature, but domestic and international veto players may dampen her fire.
Domestically, Janet Yellen has pleased progressives wary of a Biden administration stalling at home. Tax havens have led to populist uprisings on the left and right, with both forces pushing for Secretary Yellen’s Treasury Department to take action. This agreement serves as a win by appeasing the populist elements of her constituents, resulting in a higher temperature for Secretary Yellen
Similar to domestic approval, the support of various countries outside the G7 has kept Secretary Yellen’s heat level hot. On June 9th, just after the G7 finance ministers meeting closed, Secretary Yellen released an op-ed defending the GMCT with support from Indonesia, South Africa, and Mexico, showcasing her ability to form a global consensus on the issue. Irish Finance Minister Paschal Donohoe also came out in support of a global minimum corporate tax, a major step in convincing tax havens to come to the table.
Despite this international backing, Yellen’s domestic opponents have largely ruled out voting for an agreement on the Global Minimum Corporate Tax. Economic reports of inflation have made many wary of economic moves related to taxation and spending by Yellen and Biden. Republicans claim that further tax increases will carry on to consumer prices, whichrose 5% in May 2021. While likely temporary, this inflation gives veto players, such as Senate Republicans and business leaders, enough material to stall progress for the time being. Senate Republicans have thus rallied against the deal, calling it “crazy” and an unfair tax increase on American businesses. To pass and implement, Yellen’s agreement will need some Republican support, a difficult feat in a hyper-partisan country.
Not to mention that the US also serves as a tax haven for personal income, putting domestic pressure on Yellen by the wealthy to stop such a global reform. However, Yellen’s history of building consensus could bring them to the table in negotiating a deal, but Yellen may have to concede in the domestic sphere to reach a compromise, such as in domestic taxation.
International veto players could also derail Yellen’s agreement. The EU, home to tax havens such as Hungary and Cyprus, requires unanimity to ratify agreements and will likely struggle getting all of its leaders on board. However, Ireland, an EU tax haven, signaled its willingness to join negotiations, suggesting these EU tax havens could come around as well. Unfortunately, Yellen will also face international obstacles outside of the EU. China, which offers low tax rates to tech companies, has already requested an exemption from the agreement, which Secretary Yellen denied. Nevertheless, she will meet with these various veto players at the G20 summit in October, where Yellen hopes major powers will hash out the agreement.
What is driving Secretary Yellen?
Answer: A combination of US national interest and personal priority
Since her upbringing in Brooklyn, Janet Yellen has seen economics as affecting everyone but especially the middle class in which she grew up. She began her economic studies during the rise of deregulation and global financial expansion, leading to her view of tax competition as harming the global middle and lower classes. Studying under James Tobin, a renowned economist focused on inequality, she formed a viewpoint fusing her economic expertise with her middle-class background, undeniably influencing her agenda against tax havens
While her economist husband stayed in academia, she felt called to use her expertise in government. This perspective drives her to use her political standing, as chair of the US Central Bank from 2014-2018 and now as Treasury Secretary, to break barriers and to fight for those she sees as left behind. In these roles, she’s built consensus with teams from all over the economic spectrum to fight poverty and lift wages.
In the international sphere, Yellen sees the every-man-for-himself competition as destructive to national sovereignty, with the brunt borne by the global middle and lower classes. As a consensus-builder, she seeks to remedy this through multilateral agreements, setting ambitious goals for the global community to reach. This skill of building consensus is critical for passing such an ambitious policy on both the domestic and international stages. Instead of focusing on the politics or spectacle of negotiations, Yellen is looking for results to help the type of people she grew up around; at her heart, she’s still an economist, not a politician. Yellen even says that she sees 15% as a “floor,” and wants “ambitious” discussions to continue on the GMCT.
Through Yellen’s eyes, the COVID-19 pandemic provides an especially critical moment to tackle these issues through global taxation. As a left-leaning economist, she wants governments’ recovery plans around the world to take fiscal action to lift their citizens from poverty, initiatives which will take trillions to execute. These plans need money, money which most governments lose to tax evasion.
What does this mean for you?
Answer: If successful, you will likely see a better funded government with more resources to recover from COVID-19.
Over the next few years, as the GMCT deal is ironed out and ratified, tax revenues will increase as companies begin to pay a minimum corporate tax. This new revenue means your government will have more money to spend on recovering from COVID-19. The home countries of large multinationals, such as the USA and France, will likely see the most increased tax revenue, a result of multinationals bringing revenues back home. In Secretary Yellen’s case, the US is planning an overhaul of its tax system, utilizing the GMCT as a stepping stone to bringing in more revenue. Once adopted, the GMCT could push other countries to do the same.
Internationally, reaching a global deal on a minimum corporate tax rate would bring prestige back to a weary G7. Many rising powers, including China, see the G7 as a relic of the 20th century global system, outdated and unable to fit the needs of the 21st century. Former US President Donald Trump served as a leading critic, looking to expand the G7 to add newer economic powers. Many see the G7 as a rich boy’s club putting out fancy press releases with no substance. However, if the G7, with Secretary Yellen at the helm, can successfully foster and somehow enforce this agreement, it would recover much of its legitimacy lost in the past decades.