A Step Back from the OECD’s Two-Pillar Overreach
How Congress and the G7 Pulled the United States Back from the OECD’s Global Tax Cartel
For more than a decade, international tax policy has been drifting away from the principle that countries tax economic activity within their own borders and toward an increasingly centralized system designed to constrain tax competition and redistribute taxing rights across countries. What began as a narrow effort claiming to curb profit shifting gradually morphed into an ambitious attempt to rewrite the rules of corporate taxation through a global government cartel on taxing corporations, i.e. the OECD’s two-pillar framework.
Pillar One sought to reallocate taxing rights over U.S. firms’ profits to foreign governments, while Pillar Two aimed to impose a de facto global minimum tax enforced through extraterritorial “top-up” taxes. Together, these initiatives represented a significant erosion of U.S. tax sovereignty, and an abandonment of sound economic principles fueled by a craving for always more tax revenue sources.
As Jack Salmon wrote a few months ago:
“By some estimates, American companies would have borne nearly 60 percent of the cost of this scheme. European policymakers, unable or unwilling to create an environment that fosters more entrepreneurship, argued that this is the “fairest” tax policy. What’s fair about forcing the most innovative companies in the world to subsidize the inefficiencies of high-tax welfare states?”
And Doug Holtz Eakin at AAF summarized, “These were fundamentally horrific tax initiatives, whose only virtue was that they were supposed to run off things like digital services taxes. They did not.”
Not surprisingly these bad policies were embraced by the Obama administration, and culminated in the Biden administration’s embrace of Pillar One and Pillar Two. Thankfully, the prospect of foreign governments gaining the authority to tax U.S. corporate profits while entrenching a global cartel designed to suppress tax competition triggered serious pushback in Congress, including proposals to impose retaliatory taxes, which in turn gave the United States leverage at the negotiating table.
Faced with the risk of escalation, the G7 agreed to carve out U.S. firms, and the OECD subsequently ratified that approach across its broader membership. The Trump administration deserves recognition for securing the G7 side-by-side agreement that exempts U.S.-parented companies from the OECD’s global minimum tax. After more than a decade of drift toward international tax harmonization, this agreement represents a meaningful course correction and a clear improvement over the Biden-era approach that would have exposed American firms to foreign taxation.
Adam Michel’s recent work offers one of the clearest explanations of what changed, and why it matters. Back in November, over two posts, he provided a good explanation of the international tax regime before and after the G7 agreement, showing how the OECD’s original framework threatened U.S. tax sovereignty and how the new arrangement reverses some of that damage. It is a concise guide to how the global minimum tax project lost momentum and why the outcome matters for U.S. competitiveness.
Here are a few key takeaways but I recommend reading his posts for most details:
Pillar One stalled because it lacked durable political support and would have reallocated taxing rights over U.S. firms’ profits based on customer location rather than economic activity. Its collapse would be a net benefit for the United States even if digital services taxes persist.
Pillar Two and the OECD’s 15 percent global minimum tax would have allowed foreign governments to impose “top-up” taxes on the overseas profits of U.S.-parented firms, directly undermining U.S. tax sovereignty.
The G7 side-by-side agreement exempts U.S. companies from that regime, effectively neutralizing Pillar Two’s reach over American firms and weakening the OECD’s broader tax-harmonization project.
It is also important to be honest about this victory. As Michel makes clear the recent development is not a first-best outcome. The United States did not secure the exemption by rejecting minimum taxes outright. Instead, the Trump administration, both during its first term and again more recently, imposed and strengthened minimum taxes on U.S. companies through domestic law. Michel writes:
“Sean Bray and William McBride persuasively argue that “the US system may be more stringent than Pillar Two.” Before the OBBBA reforms, US corporations paid effective tax rates above the OECD-mandated 15 percent. The OBBBA will raise those rates further.”
While not the preferred policy direction, those choices gave the United States credible leverage to argue that U.S.-parented firms were already subject to substantial minimum taxation at home, making foreign top-up taxes unnecessary and unjustified. That credibility proved decisive in securing the G7 exemption.
Where we are now is clearly better than where we were under the Biden-era OECD deal, but this can’t the endpoint. Pillar One should be fully dismantled. As Holtz Eakin writes, “It doesn’t solve all the problems – the hideous Pillar 1 remains and allows the international taxation of the domestic profits of large, successful U.S. firms – in the international tax world, but it is a significant step in international cooperation.” In addition, I would love to see president Trump fulfill his campaign promise to end the United States worldwide taxation of individuals, which continues to impose unnecessary costs on Americans living and working abroad. The G7 agreement is a significant step forward in restoring U.S. tax sovereignty, but finishing the job will require going further.