Don’t bow to calls for a global tax cartel | News, Sports, Jobs

When all you have is a hammer, everything does indeed look like a nail. This is the best way to describe the unoriginal and often destructive thinking of government officials. No matter what the problem du jour, the answer is always more government spending. But more spending requires more tax revenue, which is not always easy to acquire in the modern global economy.

This is how we got the current effort by some US officials to impose a global minimum tax. They strive to extract more revenue from US-based multinationals by limiting competition from countries with more welcoming tax systems.

In 2017, the Trump administration improved the corporate tax system by lowering the top corporate tax rate from 35% to 21%. At the same time, the global tax system, under which income is taxed by a company’s home country, regardless of where it is earned, has been replaced by a territorial tax system. In this system, income is only taxed in the country where it is earned. For example, an American company earning income in France is only taxed in France, not in the United States.

This new system is a big improvement for American companies, which in turn helps bring their foreign profits back here. However, it is pressuring politicians to further reduce tax rates and reduce incentives for companies to locate production overseas or shift reported profits overseas. Remember that there are still many countries that have lower corporate tax rates than those imposed in the United States.

It should be noted that in 2017, the United States also adopted a minimum tax called Global Intangible Low-Taxed Income, or “GILTI”, for companies that have earned a high rate of return while paying low taxes abroad. It wasn’t a great idea, but it had more merit than what Treasury Secretary Janet Yellen now has in mind – namely, imposing a minimum tax based on a company’s global average tax rate rather only on a country-by-country basis.

If Yellen really believes what she says about US corporate taxation, all she has to do is convince Congress to implement these so-called improvements. But it likely knows that raising rates here would lead to more capital flight out of the United States, so it resorts to coercing other governments to make their tax regimes less attractive to US-based companies. Hence the idea of ​​coaxing other governments into imposing a minimum headline tax rate of 15% on foreign business income earned within their borders.

Under this cartel of countries, with foreign governments pledging to refuse to compete for capital by reducing tax rates, the incentives for American companies to avoid high American taxes are seriously reduced. So are the incentives for governments to maintain their own modest tax systems.

Whether Yellen can convince countries like China and India to accept her is an open question. The proposal also faces political headwinds in the European Union, which generally supports any attempt to stifle tax competition.

Finally, it is not certain that Yellen can convince Congress to accept his project. The reason, in part, is that enough lawmakers are skeptical about whether a global minimum tax will actually increase Americans’ prosperity, especially given the current fragility of the global economy.

Such skepticism is in order. First, economists from the Organization for International Cooperation and Development, who have examined the effects of various types of taxes on economic growth in developed countries, have found that corporate taxes “be the most detrimental to growth, followed by personal income taxes, then consumption taxes.”

Second, while the legal responsibility for these taxes rests with businesses, several academic studies have found that the vast majority of the costs are passed on to workers in the form of lower wages.

Third, while the argument for increasing revenues is often presented as a tool for fiscal responsibility, the reality is quite different. Countless studies show that feeding the government beast with more corporate tax revenue increases spending rather than reducing government budget deficits. And as my recent review of the literature with Mercatus Center economist Garett Jones reveals, more deficit spending is likely to hamper economic growth.

Under these circumstances, why not let the hammer rest and try a new tool for a change? A nice, sharp saw, for example, could help reduce unnecessary spending on the budget and reduce the constant need for more revenue that drives corporate America away.

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