On June 5th, representatives of the Group of Seven, an organization comprising most of the wealthiest countries in the world, posed for a portrait on the steps of a neoclassical mansion on the west side of London. The group had just reached a historic agreement on taxation: Canada, France, Germany, Italy, Japan, the U.K., and the United States committed to implementing a global minimum corporate tax of at least fifteen per cent, which is a step toward reducing the ability of corporations to shirk taxes by transferring portions of their businesses to foreign countries with lower tax rates. It’s an important element of the Biden Administration’s effort to reduce the tax burden on the salaries of working people and to increase taxes on capital—money made from stock ownership and other investments—which would raise revenue to fund infrastructure and social-safety-net programs. For the U.S. Treasury Secretary, Janet Yellen, who stood for the portrait in a bright white jacket, the agreement represented a diplomatic victory. Later, the European Union Economy Commissioner, Paolo Gentiloni, gave Yellen credit for playing a decisive role in the negotiations that led to the agreement, saying, “Multilateralism is back” and “Yellen was crucial.”
The discussion around reducing tax avoidance by corporations and the wealthy has taken on a more urgent tone in the past ten or so years; concerns about rising inequality, coupled with revelations about offshore tax havens and the ability of wealthy individuals and some of the largest companies, such as Amazon, to avoid paying any federal income taxes in certain years, have generated outrage. When I spoke with Yellen a few days after the G-7 agreement was reached, she said that the stagnating wages and other economic losses experienced by middle- and lower-income workers since the nineteen-eighties are related to the reduction of corporate taxation. “It has also robbed the government of revenue,” she said. “If you look at public investment in infrastructure, in public education, in worker training, really, in our safety net; if you think about things like child care, paid leave, we’re not investing enough in any of those things.”
A global minimum corporate tax would eliminate, or at least reduce, incentives for companies based in one country to move parts of their operations to other countries with lower tax rates, a phenomenon that Yellen describes as a “race to the bottom.” One of the best-known examples of this scheme involves Apple, which, for years, shifted profits to subsidiaries based in Ireland. In 2017, the company had, according to one estimate, more than a hundred and twenty-eight billion dollars in profits, at least, sitting offshore, beyond the reach of U.S. tax authorities. According to another estimate, about forty per cent of the profits earned in 2017 by multinational companies around the world was funnelled into tax havens. A global minimum corporate tax would aim to change that. “The idea is, if you have to pay fifteen per cent no matter where you declare your income, there’s no reason to put your income in a zero-tax jurisdiction,” Ruth Mason, a law professor at the University of Virginia, told me. “If you’re a country that already has one, you want the other countries to have them too. The U.S. has been trying to get other countries to adopt one since the sixties.”
The agreement is only the beginning of a multipart process that must be navigated before the minimum tax would become binding for most major economies in the world. Not every country needs to agree, and many are likely to object; less developed countries could reasonably argue that it would make them less competitive with richer countries when it came to attracting foreign investment. Mason described the agreement as a “step on a long journey where the path is far from clear.” But it still represents a significant development in the fight against wealth and income inequality. The idea of trying to negotiate an agreement on minimum corporate taxes had been discussed among G-7 countries for several years; Germany, which has a relatively high corporate tax rate, often pushed the proposal. In the U.S., members of the Democratic Party, such as Senator Elizabeth Warren, have long been in favor of the idea. President Trump included a 10.5-per-cent minimum domestic corporate tax in his 2017 tax cut, but his Administration did not try to negotiate a global coöperative agreement. “It’s a bit like climate change,” Yellen told me, of global corporate taxation. “No country can really tackle it alone.”
During the Presidential transition, Yellen was briefed on the status of the global minimum tax rate discussions, which had essentially become dormant. Some of her policy advisors, though, saw a way to help revive the talks; a Treasury Department official described it as “a way to use the foreign policy process to deliver at home for the middle class.” Yellen said, “I was enthusiastic about it right away.” After Yellen was sworn in as Treasury Secretary, on January 26th, she made it clear to the other G-7 member countries that the U.S. was committed to the idea and that it was willing to negotiate multilaterally, which infused the discussion with a new momentum. Removing the ability to compete through low tax rates will, ideally, encourage countries to try to attract business by investing more heavily in education, research and development, and infrastructure, which would be good for workers and the middle class.
For Yellen, who is seventy-four, the agreement represents a moment when her belief that economic policy should be used as a tool for advancing social-justice goals will be put to the test. Throughout Yellen’s academic career, and during her multiple tours in government, she has focussed her work on poverty and unemployment. She grew up in Bay Ridge, Brooklyn, where her father was a family doctor and her mother an elementary-school teacher. She graduated in 1963 from Fort Hamilton High School, where she was the valedictorian. She attended Pembroke, the women’s college at Brown University, and soon became captivated by economics, which she saw as a mechanism for raising living standards. As a college senior, she attended a presentation by an economist at Yale named James Tobin, who was influenced by Keynesian economics, which is based on the idea that governments could and should intervene in the economy to alleviate economic crises and create jobs. Tobin argued that there was a direct connection between economic policy and doing social good, a point that resonated with Yellen. In 2014, she told The New Yorker’s Nicholas Lemann that she admired Tobin “because he had a passion for social justice and for public policy.”
She applied to graduate school in economics at Yale, where Tobin served as her adviser; she received her Ph.D. in 1971, taught for a few years in the economics department at Harvard, and then spent a year working at the Federal Reserve in Washington, where she met her husband, George Akerlof, an economist at U.C. Berkeley. Yellen became a professor at Berkeley’s Haas School of Business, in 1980, and she and Akerlof conducted extensive academic research together. Some of their most-cited papers deal with “efficiency wage theory,” which posits that it is in a company’s interest to pay workers more than the going market rate, because it will be good for worker productivity and will lead to lower employee turnover. Andrew Kenan Rose, who was an associate dean at the Haas School from 2010 to 2016 and worked closely with Yellen, told me that she and Akerlof tried to apply efficiency wage theory in their own lives. He recalled that when Yellen and Akerlof were young parents, they had to search for a babysitter, and took it as an opportunity to test their hypothesis. “I can’t remember what the numbers were,” Rose said; he used hypothetical figures instead: “If the going rate for a babysitter was ten dollars an hour, they offered fifteen, so they got the best pick and they never had to worry about the babysitter quitting on them. And, if they returned early from dinner, they would not find the babysitter doing something she wasn’t supposed to do.” He added, “It was the interplay between reality and theory that interested her.”
Yellen spent the decades that followed cycling in and out of government, serving twice as a member of the Federal Reserve Board of Governors, under Presidents Clinton and Obama; as the chair of the Council of Economic Advisers, during Clinton’s second term; as the president of the Federal Reserve Bank of San Francisco, from 2004 to 2010; and, during Obama’s second term and part of Trump’s tenure, as the chair of the Federal Reserve. During a speech she gave in March, 2014, shortly after becoming the Fed chair, she effectively summarized her world view: “Our goal is to help Main Street, not Wall Street.”
Shortly after the global tax agreement was announced, Yellen spoke for about thirty minutes during a news conference in London. “This meeting is much more enjoyable and productive than the Zoom version,” she began. “More importantly, our meetings this weekend emphasized the power of global coöperation.” She talked about the pandemic and the economic crises it had caused around the world, and urged wealthier countries to continue to respond actively by helping nations with fewer resources to vaccinate their populations; she also talked about the need to address climate change. “Perhaps most notably this weekend, G-7 economies came together to agree the post-pandemic world must be fairer, especially with regard to international taxation,” Yellen said. “We need to have stable tax systems that raise sufficient revenue to invest in essential public goods, and respond to crises, and insure that all citizens and corporations fairly share the burden of financing government.”
