Fair tax systems are vital for strong climate action
Fast on the heels of the Leaders’ Summit on Climate hosted by the United States last week, the Biden administration will start working in earnest to advance its American Jobs Plan in Congress. Infrastructure investments aimed at combating climate change are at the center of the plan designed to spur emissions-reducing actions, generate economic growth and create jobs.
But there is also another critical dimension to the administration’s initiative — significant revisions to the tax code to increase corporate tax payments. While few are connecting tax fairness to combating climate change, making headway on this tax reform agenda is in fact a critical part of the puzzle for mobilizing action to tackle climate change.
While many economists have pointed out that the U.S. can sustain significantly increased investment spending without fully paying for all of it now, Biden’s “Made in America Tax Plan” is aimed at something more fundamental than just an immediate “pay-for.”
Climate change is a global problem, and we are going to need resources on a global scale for the investments needed to tackle the climate crisis. Closing tax loopholes and ending the global race to the bottom on corporate tax rates will help provide the vital resources that developed and developing country governments alike need to shift and adapt their economies to meet the demands and opportunities of green transitions. In some countries, carbon taxes can help generate revenues, but the administration’s tax plan can play a different — and much needed — role in building the resources needed globally.
The Biden plan would curb corporate profit shifting opportunities — artificially booking profits in low-tax countries — and position the U.S. to be a leader in corporate tax competition.
A fair and equitable global tax system would put an end to tax havens — whether the often-mentioned Cayman Islands or the tax havens in major industrialized countries such as Ireland or the Netherlands.
Multinational companies, including those making notable climate commitments, should not be able to use complex tax dodging schemes with amusing names — the “Double Irish” or the “Dutch sandwich” — to unfairly starve government treasuries around the world. Major corporations have been gaming the current tax laws by placing subsidiaries in low-tax jurisdictions and employing other profit-shifting strategies. Academic research indicates that, in recent years, the U.S. was losing an estimated $100 billion a year from corporate profit shifting. Following former President Trump’s 2017 tax cuts, the United States has one of the lowest rates of revenue from corporate income tax as a percentage of GDP among OECD countries. The U.S. is not alone in its declining corporate tax receipts. While the statutory corporate rate among OECD countries was 32.2 percent in 2000, it had fallen to 23.3 percent in 2020.
The Biden plan proposes a 21 percent global corporate minimum income tax that, if agreed to, would be a huge game changer. The international tax dimensions of the Biden tax plan would start a virtuous cycle in tax policy around the world and help ensure countries have the revenues they need for climate action along with other critical needs.
The climate finance needs are most acute in developing countries. Already struggling with declining aid and unmet promises regarding climate funding, they are now reeling from pandemic-induced economic pain and a re-emerging debt crisis. Ensuring that the global tax system does not rob them of resources needed to rapidly adapt their economies and societies — including to fight climate change — must be a priority for world leaders.
Biden’s pledges released Thursday mark important increases in U.S. public climate financing provided to developing countries as a contribution to the global goal of mobilizing $100 billion annually from public and private sources. The conversation about climate finance must also include the role improved corporate taxation can play in providing developing and developed countries alike with the financial resources they need. An essential commitment that private sector actors can make in the fight against climate change is to end aggressive tax avoidance.
The competition between countries on corporate tax rates must be ended if governments are to have the resources needed to decarbonize our economies and build resilience to climate impacts. According to OECD and other analysts, around $2 trillion in investment just in the energy sector is needed each year to transition to a pathway consistent with keeping temperature change below the dangerous level of 1.5 degrees Celsius (2.7 Fahrenheit ). The good news is that this public and private investment will provide substantial jobs and benefits, with analysis from the New Climate Economy project estimating $26 trillion in economic gains from bold climate action by 2030.
Supporters of strong climate action, including businesses, should support the Biden tax plan and an end to global tax dodging and tax competition as a key component to invest globally in the fight against climate change. More than 400 companies with over $4 trillion in annual revenue signed a letter in support of an ambitious 2030 emissions reduction target of at least 50 percent, a level which the administration’s new plan adopts. These companies should also support tax policies that can help spur the investments needed in the U.S. and around the world.
Making sure corporations and the rich pay their fair share of taxes is a widely supported idea, with around 70 percent of Americans saying that corporations pay too little in federal taxes. This year should be the year in which the struggles for climate justice, economic justice and tax justice converge. Many of the countries that participated in the Biden Leaders Summit on Climate are also at the negotiating table to agree on new global corporate tax rules being hashed out at the OECD. Several important countries such as France and Germany have reacted warmly to the U.S. global tax proposals.
It’s time for all government and corporate leaders pushing for real climate action to understand that fair taxes are a critical part of the solution.
Ian Gary is executive director of the Financial Accountability and Corporate Transparency (FACT) Coalition.
David Waskow is an international climate policy expert based in Washington, D.C., with more than 20 years of experience working on UN climate and other negotiations.