Opinion: Trump’s tax legacy is secure whatever happens in 2024
It’s one of the great ironies of recent history that a populist Republican may have helped make international tax policy more progressive.
Donald Trump will be remembered by many for a lengthy list of controversies, to put it mildly, but his shake-up of the US tax system helped lay the groundwork for international tax reform.
The OECD based its pillar two proposal on provisions of the Tax Cuts and Jobs Act (TCJA), the most radical reform of the US tax code for 30 years. No one predicted that the TCJA, which was signed into law in December 2017, would lead to a global minimum tax rate.
Trump’s radical tax plan established the global intangible low-taxed income (GILTI) rules and the base erosion anti-abuse tax (BEAT). These provisions brought back an old idea in US tax policy: minimum tax rates.
Many of the TCJA provisions are set to expire in the next two years and the US corporate tax rate may well change again. Nevertheless, the basic architecture of the TCJA remains in place behind the Inflation Reduction Act (IRA), which President Joe Biden signed off in August last year.
From Trump to Biden
President Biden came to power on a mandate to reverse most of what Trump had imposed during his dramatic four years in office. When it came to tax, Biden set out to build on the TCJA and raise the GILTI minimum rate from 10.5% to 21%.
This pledge was soon scuppered by a lack of a strong Democratic majority in Congress. Senators Joe Manchin and Krysten Sinema were able to block the proposal at every turn and extract concessions. In the end, Biden settled for a minimum rate of 15%.
This rate may become the international norm in 2023 as more countries implement pillar two. Whether US support for pillar one will carry the proposals all the way to success is less clear, but it’s not impossible.
The world may be moving into a different era for tax rules thanks to Biden and Trump. It’s one of the great ironies of recent history that a populist Republican may have helped make international tax policy more progressive.
Many Trump supporters would hate to admit that the IRA was partly made possible by the Trump tax cuts. Meanwhile, many Trump critics would squirm at this uncomfortable truth. But this is not unprecedented.
It’s also not the first time that the OECD has looked to the US for models given that the country is so powerful and influential. US support can make or break international agreements. This was true with the Foreign Account Tax Compliance Act (FATCA), enacted in 2010.
President Barack Obama supported FATCA on the grounds of reinforcing tax compliance, but the Obama administration also refused to share the financial information it had gathered.
The OECD designed the Common Reporting Standard partly on FATCA. The Paris-based organisation took the US model and turned it into an international standard for automatic information exchange. Not everyone is happy with this approach, but it’s one simple way to make your reforms more likely to succeed.
The race to the top
While it remains unclear which Republicans will challenge Trump, the former president has a head start after having declared his candidacy in November.
Many conservative pundits want to see Florida Governor Ron DeSantis run against Trump, but the former president still has a loyal base among Republican voters. They might still opt for a ‘new’ Trump to try to retake the White House next year.
By contrast, President Biden has not declared whether he will stand for re-election or not. He may either let someone else run or defend his record. Either way, the Democrats will have to defend the IRA.
Since Biden reformed the Trump tax plan, the Republican campaign will likely focus on tax as a key issue for businesses and voters. If recent history is anything to go by, the 2024 US presidential election will be eventful to say the least.
Regardless of the result, Trump’s legacy of tax reform is etched in stone. The TCJA changed the US tax system and the IRA helped make those changes a global norm.