Global Minimum Tax Shortfall Undercuts OECD’s Own Selling Points

The OECD spent the last decade selling its Pillar Two minimum tax on the promise it would bring in significant new revenue. Its latest figures estimate the 15% global tax raised between 79 billion and 109 billion euros ($91.2 billion to $125.8 billion) in 2024. That’s about a third of what the organization projected in 2023, a number that shrinks with every publication.

There are three takeaways from the OECD’s announcement last month, and none of them help the case for the tax.

Underperforming revenue reflects unrealistic expectations. The Organization for Economic Cooperation and Development has never had a good grasp on how much its international tax regime could raise. In 2020, it put the more comprehensive two-pronged plan at about 4% of global corporate income tax revenues. Three years later, it inflated to 9% for the Pillar Two minimum tax alone. In 2024, the projection was 6.5% to 8.1%. The OECD’s latest estimate for 2024 revenue is 2.4% to 3.4% of global corporate revenue.

The early models were optimistic by construction. They relied on older data that overstated profit shifting, assumed near-universal adoption, and failed to account for carve-outs and safe harbors that any global political compromise was always going to require.

Reality cut into each assumption. About 55 of the original 140 jurisdictions have started implementing the new taxes, and multiple income exclusions and safe harbors narrow the tax’s reach. Most consequentially, global profit shifting declined over the past decade, undermining both available revenue and the rationale for Pillar Two in the first place.

It’s not just the OECD’s global revenue figures either. National estimates also were optimistic, built on the false promise of revenue foreign treasuries expected to collect from US multinationals. That revenue was never really theirs.

As the Tax Foundation’s Daniel Bunn argued, either Democrats would tighten US minimum taxes to keep the revenue at home, or we’d end up with the current state of affairs, where Republicans pushed for the existing US system in place of the OECD rules. Neither scenario ends with foreign governments claiming significant portions of the US tax base.

The hit to investment is still to come. The OECD release claims that targeted companies saw no measurable decline in investment or employment in 2024. Like the early revenue projections, the claim is premature. The absence of a significant detectable first-year decline doesn’t show that investment is unaffected.

The substance-based carveout means the tax falls most heavily on profits from intangibles, not physical assets and payroll. Under current rules, physical investment doesn’t directly trigger the tax because the exemption scales with new investment. But the exemption is set to shrink over time, and European Commission-funded research argues for eliminating it entirely. As the carve-out shrinks, the tax will penalize real investment and employment.

More telling is the OECD’s own report, which notes that other research contradicts its reassurances that the new tax will raise revenue without changing behavior. The report estimates an effective tax rate increase of 1.7 percentage points. Applying recent estimates of how taxes affect investment implies the OECD tax will reduce investment by about 8%. Eventual investment declines are forecast by other OECD research, the United Nations, and private research.

The OECD project was probably unnecessary. The largest increases in effective tax rates occurred among multinational companies subject to a domestic income inclusion rule, or IIR. Companies outside an IIR showed smaller tax increases, with less statistical certainty. The OECD taxes also had smaller effects on US multinationals than on the full sample.

These findings suggest that countries didn’t need a globally coordinated system of overlapping domestic minimum taxes, undertaxed-profit rules, and reporting regimes to produce the tax-rate increases documented by the OECD. Countries could have adopted their own residence-based minimum taxes, without an OECD mandate, and achieved a similar result.

This is what the United States did. Removing US multinationals from the sample increased the estimated effect on effective tax rates. The OECD speculates this is partly due to the separate US top-up system in place since 2017, and partly due to the temporary safe harbor. So, one interpretation of this result is that US firms entered the new system with higher tax burdens already in place, as has been documented elsewhere. Exempting them under the side-by-side agreement, therefore, doesn’t appear to have materially weakened the minimum tax.

The US already taxes the foreign earnings of US multinationals through net controlled-foreign-corporation tested income known as NCTI. Although the US and OECD rules differ, they both impose additional home-country tax when foreign income is taxed below a specified minimum rate.

The OECD constructed a sprawling and costly international regime to achieve a result that individual governments largely could’ve accomplished on their own.

Key Takeaways

The only way the OECD tax collects more is by directly taxing the investment and jobs it currently exempts. From here on out, every euro of additional revenue will come with new economic costs. And the modest revenue it did raise could’ve been collected without the OECD’s elaborate apparatus of overlapping rules, safe harbors, and costly reporting systems.

At the end of the day, the OECD global tax is a transfer from the private sector to governments that doesn’t create new wealth. That transfer is only positive if the resulting government spending is productive enough to outstrip what the private sector would’ve done with the funds and any resulting economic costs.

With compliance costs alone likely running into the billions, and future lost investment from higher effective tax rates, the global minimum tax is shaping up to impose costs that are strikingly large relative to the modest revenue it raises.