One of the great skills of competitive sports is salvaging a narrow win—or at least, a draw—from a lost position. The U.S. may need to activate this skillset in response to the global minimum taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
agreement known as Pillar Two.

This agreement, our new research paper shows, presents two major risks to the U.S. tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.
. First, foreign adoption of Pillar Two will result in higher foreign taxes for U.S. shareholders and may also result in lower revenues to the U.S. Treasury. Second, it may limit Congress’s ability to set its own tax policy. While the U.S. is likely to benefit from some inbound profit shiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens.
—MNEs reporting more income to the U.S. rather than low-tax countries abroad—this is unlikely to outweigh the downsides of the agreement.

Pillar Two is, at best, a mediocre development for the U.S. However, the U.S. cannot unilaterally opt out of these global policy changes; other countries would also have to abandon their legislation enacting the new rules. Much of the results modeled in our new research paper are the consequence of other sovereign countries’ actions, not any U.S. policy change that could be canceled.

Furthermore, it is unlikely that other countries will share the U.S. perspective. The U.S. has an outsized share of the world’s largest MNEs (nine of the top ten MNEs by market capitalization are U.S. firms). Therefore, an attempt to raise revenue from large MNEs will fall more heavily on the U.S. than other countries.

Additionally, the U.S. government was already able to sustain moderate corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.

rates in the absence of Pillar Two. One of the selling points of the deal—that it will reduce the competitive pressures that drive corporate income tax rates lower—is less relevant to the U.S., which already had plenty of leverage to keep a moderate corporate rate. (It should be noted, however, that the U.S. is still subject to some competitive pressure. And even moderate rates affect its MNEs’ competitiveness, especially as the U.S. has tried to limit workarounds or avoidance.)

The best read of the global situation, then, is that many other countries have reason to go forward with Pillar Two, even if the U.S. does not. There will likely be no opportunity to rewind the clock or entirely avoid the risks presented by Pillar Two. Perhaps U.S.-based advocates of Pillar Two oversold the benefits to the U.S., but now it is more important to look forward. The U.S. can only respond and attempt to salvage a win or a tie from a difficult situation.

A Blueprint for Mitigating Pillar Two Risks

Though Pillar Two likely contains more downside for the U.S. than upside, a solid policy response in 2025 or 2026 can take advantage of some of the benefits and mitigate the harms. The solutions that follow are not necessarily ideal tax policies that one might devise if starting from scratch. Instead, they are conditional on the particular scenario thrust upon our policymakers: a global deal with coercive elements seeking to enforce compliance with a particular set of tax rules, some of which may be arbitrary or suboptimal. These solutions are a response to the reality of that given situation, not a vision of tax policy at its theoretical best:

Take advantage of inbound profit shifting. Pillar Two can result in firms reporting more of their earnings to the U.S. rather than low-tax jurisdictions. In other words, Pillar Two may work as designed, squeezing money out of small, low-tax countries and allowing others to grab that revenue instead. In our preliminary modeling, a global adoption of the 15 percent minimum will shift profits toward the U.S., resulting in $99.3 billion of new revenue over a decade. While this increase in revenue will likely be offset by the combination of reduced individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.
collections and higher foreign tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.
s, it is still substantial.

The U.S. could maximize its attractiveness as a destination for inbound profit shifting, for example, by ensuring that highly mobile income is subject to the minimum permissible taxation under Pillar Two. Key U.S. competitiveness features that encourage inbound profit shifting, like the incentive for Foreign-Derived Intangible Income (FDII)Foreign Derived Intangible Income (FDII) is a special category of earnings that come from the sale of products related to intellectual property (IP). If a U.S. company holds IP in the U.S., such as patents or trademarks, and has sales to foreign customers based on that IP, the profits from those sales face a lower tax rate.
, should be preserved or reformed. Mobile income could also be taxed with a Pillar Two-compliant Qualified Domestic Minimum Top-up Tax (QDMTT) at the minimum 15 percent rate, but no more, to achieve maximum competitiveness. In addition to competing on rate, the U.S. could also become more attractive through provisions like expensing for research and development (R&D) and capital investment.

Secure concessions on existing U.S. tax provisions. Though U.S. rates generally exceed Pillar Two’s 15 percent minimum, U.S. policy does not align perfectly with Pillar Two. U.S. regulations define both income and tax somewhat differently than Pillar Two’s Model Rules do. Global Intangible Low-Tax Income (GILTI), the U.S. equivalent of Pillar Two’s Income Inclusion Rule (IIR), was designed before IIR rules were created, and does not fully align with IIR requirements. Furthermore, the U.S. sometimes uses nonrefundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit.
s to incentivize beneficial business activities like R&D.

The U.S. should negotiate to make at least some of these regimes permissible under Pillar Two rules, if only to minimize the need for disruptive change and new legislation. Perhaps GILTI does not achieve every goal of an IIR, but it predates the IIR and serves as a kind of model for the IIR, therefore it should be recognized as valid. U.S. R&D incentives are also extremely vulnerable to clashing with Pillar Two because the U.S. leans so heavily on nonrefundable tax credits. Pillar Two rules arbitrarily crack down disproportionately on these, relative to other kinds of incentives. The result: Pillar Two rules are more likely to restrict or override U.S. R&D incentives while leaving other countries’ regimes—even those that are more generous than the U.S.’s—untouched. Finding a diplomatic fix for this problem should be a priority.

Use workarounds to save domestic tax provisions. If negotiations over, for example, U.S. R&D provisions fail, Congress should save valid tax policies by working within the Pillar Two rules, as arbitrary as they may be. There is an arithmetic or accounting quirk in Pillar Two that can be used to the advantage of a savvy legislature. Pillar Two’s enforcement mechanisms are designed to ensure that tax divided by income should be greater than 15 percent. If a legislature designs a policy deemed an increase in income, rather than a reduction in tax, it adds to the denominator of the fraction rather than decreasing the numerator. A change to the denominator is only about a sixth as powerful as a change to the numerator. Therefore, the more Congress can get its policies labeled as increases in income, instead of reductions in tax, the more room it has to work within Pillar Two rules.

This could be costly, depending on the provision. One hypothetical solution, converting nonrefundable credits into qualified refundable credits so they could be counted as income under the Model Rules, was outlined in Tax Notes by a group of PwC experts. They estimate it would cost the U.S. $193.1 billion in revenues over 10 years, though subsequent guidance on Pillar Two has likely made less costly solutions possible.

Take the opportunity to remove messy, non-neutral, or unnecessary provisions. Pillar Two presents an opportunity to remove or reform policies that are complex, non-neutral, or duplicative. The minimum tax may effectively cancel out some tax credits. While we offer guidelines for preserving the worthier tax credits above, Congress could also respond by eliminating less worthy tax credits. In addition, and perhaps more importantly, Congress could alter the beleaguered corporate alternative minimum tax so that it serves as a QDMTT. Congress should consider tax compliance costs for U.S. firms when making policy, not just because it reduces returns to shareholders, but also because it occupies the time and effort of intelligent people who could better serve the economy elsewhere.

In short, Congress should recognize that Pillar Two has significant U.S.-specific downsides, but also that it cannot unilaterally stop Pillar Two from taking effect. Instead, it should carefully consider a policy response for the next Congress, when a variety of forces are likely to compel it to act. The U.S. has a “safe harbor” reprieve from Pillar Two’s enforcement mechanisms, but these expire at the end of 2026. In addition, a variety of international tax provisions from the 2017 Tax Cuts and Jobs Act (TCJA)The Tax Cuts and Jobs Act in 2017 overhauled the federal tax code by reforming individual and business taxes. It was pro-growth reform, significantly lowering marginal tax rates and cost of capital. We estimated it reduced federal revenue by .47 trillion over 10 years before accounting for economic growth.
will tighten in 2026, and a wide variety of TCJA’s individual income tax provisions will expire at the end of 2025.

When the next Congress takes up tax reform, it should consider some of the elements outlined above to mitigate the downsides of Pillar Two.

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