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1 Alan Cole & Cody Kallen, Risks to the U.S. Tax Base from Pillar Two 1 (2023)

handle is hein.taxfoundation/rstteus0001 and id is 1 raw text is: *STAX FOUNDATION Risks to the U.S. Tax Base from Pillar Two Alan Cole Senior Economist Cody Kallen Research Fellow August 2023 Key Findings • Pillar Two, an international tax agreement, is intended to incentivize countries to set corporate income tax rates at 15 percent or higher. This agreement threatens the U.S. tax base in two ways: potential lost revenue and limitations on Congress's ability to set its own tax policy. • We analyze the revenue effects of other countries adopting Pillar Two-compliant minimum taxes, though these estimates are subject to considerable uncertainty. U.S. corporations will be able to take larger foreign tax credits, reducing U.S. corporate tax revenues by $64.3 billion over 10 years, but they will also likely report more of their income in the U.S., raising U.S. revenues by $99.3 billion. On net, we estimate that foreign Pillar Two adoption increases U.S. corporate tax revenues by $34.9 billion over 10 years. • However, the agreement would also result in significantly lower post-corporate-tax incomes for U.S. shareholders. This would reduce U.S. individual income tax collections from taxes on dividends, capi- tal gains, and retirement plan distributions. Accounting for this effect and for modeling uncertainty, the full net impact of foreign Pillar Two adoption on the U.S. fiscal system is ambiguous. • Modifying U.S. international provisions to become more compliant with Pillar Two does not necessar- ily increase revenues. Pillar Two's country-by-country system raises more revenue than the U.S. blend- ed system. However, Pillar Two's substance carveouts are more generous to taxpayers in the early years of the agreement. • Pillar Two relies on an extraterritorial enforcement mechanism, the Undertaxed Profits Rule (UTPR) to encourage adoption. This rule threatens to allow foreign countries to tax U.S. companies on U.S. income, and further, to effectively negate tax policies passed by Congress. • The UTPR may not be effective at curbing low corporate income taxes, and businesses and legisla- tures may expend valuable resources circumventing it. The Tax Foundation is the world's leading nonpartisan tax policy 501(c)(3) nonprofit. For over 80 years, our mission has remained the same: to improve lives through tax policies that lead to greater economic growth and opportunity. TAX FOUNDATION 1325 G STREET, NW, SUITE 950, WASHINGTON, DC 20005 202-464-6200 1 laxfoundation.org