Edward Conard

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Upside of Inequality Oxford Unintended Consequences

AI Summary. The paper proposes making the high-tax exclusion mandatory under the US minimum tax on foreign corporate earnings, with the exclusion threshold set at the minimum tax's effective rate, so the tax applies only to income below that threshold. The authors estimate this would raise $68.5bn–$72.9bn over a decade while reducing tax-avoidance opportunities.

Kyle Pomerleau American Enterprise Institute
Date Posted:

.@kpomerleau argues that mandatory exclusion of high-tax foreign income for Global Intangible Low-Tax Income (GILTI) calculations would “reduce incentives to shift mobile assets to foreign jurisdictions” and raise $68.5-72.9B in 2025-35.@kpomerleau

Would a mandatory high-tax exclusion raise revenue and curb tax avoidance?

Core argument: Making the GILTI high-tax exclusion mandatory would raise between $68.5 billion and $72.9 billion between 2026 and 2035, according to the paper.

An area that deserves close inspection is Global Intangible Low-Tax Income’s structure as an overall minimum tax on foreign operations. This paper outlines a straightforward reform to GILTI: a mandatory high-tax exclusion. Under current law, corporations can elect to exclude the profits and related foreign taxes that face an effective tax rate [ETR} above a certain threshold. This reform would make this election mandatory and, as a result, GILTI would only apply to income below the exclusion threshold. The effective rate test for the mandatory high-tax exclusion, which is currently 18.9 percent (90 percent of the statutory tax rate of 21 percent), should be set at GILTI’s ETR. For example, if the corporate tax rate is 21 percent and the GILTI ETR is 13.125 percent, the high tax exclusion ETR test should be set at 62.5 percent of the domestic tax rate or 13.125 percent. This reform would reduce opportunities for tax avoidance and reduce incentives to shift mobile assets to foreign jurisdictions while having a minimal impact on complexity, [and] would raise btw $68.5 and $72.9 billion btw 2026 and 2035.

Takeaways by Macro Roundup® AI

  1. Making the GILTI high-tax exclusion mandatory would raise between $68.5 billion and $72.9 billion between 2026 and 2035, according to the paper.
  2. The paper proposes setting the high-tax exclusion effective rate test at GILTI's own effective tax rate — 13.125 percent, or 62.5 percent of a 21 percent corporate rate — rather than the current 18.9 percent threshold.
  3. Under current law corporations may elect to exclude foreign profits and related foreign taxes facing an effective tax rate above a threshold; making that election mandatory would apply GILTI only to income below the exclusion threshold.

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