Treasury Secretary Janet L. Yellen secured a landmark international tax agreement over the weekend, one that has eluded the United States for nearly a decade. But with a narrowly divided Congress and resistance from Republicans and business groups mounting, closing the deal at home may be an even bigger challenge.
The Biden administration is counting on more than $3 trillion in tax increases on corporations and wealthy Americans to help pay for its ambitious jobs and infrastructure proposals. Republicans have expressed opposition to any rise in taxes and have warned that President Biden’s big spending plans are fueling inflation and will deter business investment. Business groups have complained that higher taxes pose a threat to the economic recovery and will put American companies at a competitive disadvantage.
Persuading members of the Group of 7 advanced economies to agree on Saturday to a global minimum tax of at least 15 percent was intended to help the Biden administration win support for its U.S. tax increases. If enacted, the global minimum tax would require that companies pay at least a 15 percent tax on income, regardless of where they are based, making it less advantageous to relocate operations to countries with lower tax rates.
In an interview on Sunday, Ms. Yellen acknowledged the legislative challenge ahead and defended the Biden administration’s plans to raise taxes on corporations. She stood behind Mr. Biden’s proposal to raise the corporate tax rate in the United States to 28 percent from 21 percent.
“We think it’s a fair way to collect revenues,” Ms. Yellen said on her flight back to the United States from London after attending two days of meetings with G7 finance ministers. “I honestly don’t think there’s going to be a significant impact on corporate investment.”
Ms. Yellen played down the relationship between tax rates and business spending, arguing that the $1.5 trillion tax cuts that Republicans passed in 2017 did little to lift American investment. She said that the changes to the international tax code would ultimately be beneficial to U.S. firms and that even those who face higher taxes, such as Amazon, Facebook and Google, would gain from the additional certainty about their tax bills.
But the fate of Mr. Biden’s proposals is not certain, and Ms. Yellen now faces the task of convincing lawmakers that large tax and spending increases will not hinder the economic recovery.
Mr. Biden has been negotiating with Republican lawmakers and has expressed a willingness to narrow the scope of his tax and spending plans to rebuild the nation’s roads and bridges. The president has offered to drop his proposal to raise the corporate rate to 28 percent to secure bipartisan support, though White House officials expect to try to push that higher rate through in a separate legislative vehicle that can pass without any Republican support.
Ms. Yellen acknowledged that compromise on the corporate tax rate might be necessary and said that she hoped for a bipartisan infrastructure agreement. Republicans are resisting any changes to the 2017 tax law, which cut the corporate tax rate to 21 percent.
It is unclear if Republicans will support the international tax agreement, particularly a decision to impose a new tax on big, multinational corporations — even if they have no physical presence in the countries where they sell those services. That part of the agreement was offered by the United States to put to rest a fight with European countries over their digital services taxes that would hit large American technology companies.
Some lawmakers have already criticized the idea as ceding taxing authority to other governments, and many business groups were still absorbing the agreement over the weekend. Ms. Yellen believes that the concept will not cost the United States much in terms of lost tax revenue. However, the fact that European countries are not dropping their digital services taxes until a deal is fully enacted has already been criticized by top Republicans in the House and Senate given it could take four years for the agreement to be put in place.
If the Biden administration cannot shepherd the tax legislation through Congress, the agreement on the global minimum tax — and a separate deal that was reached on Saturday on a system for taxing large companies based on where their goods and services are sold — will be for naught. Negotiators are hoping to broaden the agreement to more countries at the Group of 20 meetings in Italy next month and then finalize a pact in October. Then countries, including the United States, will have to change their laws accordingly.
The G7 summit was Ms. Yellen’s first trip abroad as Mr. Biden’s top economic diplomat. In London, Ms. Yellen received praise from her counterparts for restoring American leadership and for the Biden administration’s embrace of multilateralism after four years of President Donald J. Trump’s “America First” policies.
The Treasury secretary described the job as more grueling than her previous role as chair of the Federal Reserve, pointing to the scale of the relief programs that she is overseeing and the department’s vast portfolio. An economist who has focused for years on monetary policy, Ms. Yellen is now in charge of sanctions policy, tax policy, overseeing regulators and dealing regularly with Congress.
Beyond the tax negotiations, Ms. Yellen is grappling with the sensitive question of inflation and whether the president’s policies are going to stoke higher prices for a sustained period. Businesses in the United States have expressed growing concern about rising prices, along with a shortage of commodities, and a lack of available workers.
Ms. Yellen maintained that she believed rising prices were a short-term issue related to the reopening of the economy and snarled supply chains. Still, the chance of a sustained jump in prices remains a concern that she is tracking closely.
To determine if inflation is more than a temporary matter, Ms. Yellen is monitoring two key metrics: inflation expectations and wage increases for low-paid workers. Rising pay for the lowest-wage workers could potentially lead to “an inflationary trend” if there is broad excess demand for workers in the labor market, she warned.
“We don’t want a situation of prolonged excess demand in the economy that leads to wage and price pressures that build and become endemic,” Ms. Yellen said. “Looking at wage increases, you can have a wage price spiral, so you need to be careful.”
She added: “I do not see that happening now.”
At the G7 meeting, Ms. Yellen raised eyebrows when she said that inflation could remain higher for the rest of the year, with rates around 3 percent. However, in the interview, she said that the comment was misinterpreted. She said that she expected inflation rates to be elevated for the next few months but then settle down to be consistent with the 2 percent rate that is the Federal Reserve’s long-term target.
“I don’t see any evidence that inflation expectations are getting out of control,” Ms. Yellen said.
Critics have suggested that the Biden administration’s extension of pandemic unemployment insurance is fueling the labor shortage by encouraging workers to stay at home and collect generous benefits. At least 20 states have moved to cut off benefits early to encourage people to go back to work.
Ms. Yellen said the difference in how states were handling jobless benefits could shed new light on the dynamic, but that she still saw no evidence that the supplement was slowing job creation. She pointed to a lack of child care and positions that were permanently lost because of the pandemic as the more probable reason that employers in some sectors were struggling to find staff.
“We wanted to support people,” Ms. Yellen said. “This isn’t something that should be in place forever.”
Although the economy is improving, Ms. Yellen said that seven million jobs that were lost since the pandemic still had not been restored. Some of them might never come back.
“We’re not in a tight labor market at this point,” she said.
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