There is a certain irony that a group of rich countries is pushing for policies that will disadvantage poorer countries. Yet that is exactly what the leaders of the world’s largest economies did when they approved a 15% global minimum tax rate on large corporate profits, a deal that has since grown and grown. pledges from leaders of 136 countries.
The objectives of the agreement are simple. This creates a tax cartel, and high tax countries believe it will limit competition from countries with lower and simpler taxes. It also benefits richer and more taxed countries by shifting income from countries where companies are headquartered to countries where companies sell. At the heart of these two goals is the need to feed the huge budgets of rich nations.
Here’s the skinny on a global minimum tax: Most countries, including the United States since the passage of the Tax Cuts and Jobs Act of 2017, use some version of a “territorial” system. Territoriality is a basic principle of good tax policy and means that governments do not tax income earned abroad by their taxpayers. Rather, this money is taxed by the foreign jurisdictions where it is earned. Companies can choose where to do business based on which country has the best tax regime. This approach puts pressure on governments with punitive tax regimes to become less draconian.
High-tax countries don’t like this competition, which is why they have been eager over the past decade to undermine it with a global minimum tax. And while the US government stands to benefit immensely from the new regime, US companies with foreign affiliates and revenues will not.
The interesting thing is that some advocates don’t bother to hide the fact that their goal is simply to extract more revenue from the companies. In a recent Washington Post article, economist and former Treasury Secretary Lawrence Summers applauded the new deal:
“Countries have come together to ensure that the global economy can create widely shared prosperity, rather than reducing tax burdens for those at the top. By providing a more sustainable and solid income base, the new minimum tax will help finance the kinds of public investments that are critical to economic success in all countries.
Summers seems to believe that higher tax rates inevitably lead to higher tax revenues and that politicians will always use the money in ways that promote growth. It’s putting a lot of faith in the idea that politicians will fund worthwhile investments, instead of introducing all kinds of economic distortions or buying votes by fueling corporate welfare. A glance at the “Build Back Better” legislation making its way through Congress, chock-full of counterproductive tax credits and other policies, shows that this faith is unwarranted.
In addition, academic work by the Tax Foundation, the International Monetary Fund, the Organization for Economic Co-operation and Development, and others shows that increasing the corporate tax rate is one of the least ways. efficient ways of increasing revenue and decreasing gross domestic product. This is in part because it reduces investment and, in turn, lowers workers’ wages and raises consumer prices.
Companies might not be popular, but if we squeeze them too hard, how many increases can we expect them to distribute to American workers? What happens to the prices we pay for their products? Even businesses need responsible government, which means having options in case taxes get too punitive.
The irony, of course, is that while the United States and its richer friends should benefit at the expense of poorer countries, the deal is being sold in the name of fighting inequality at home. Or, as Summers puts it, to avoid “lower tax burdens for those at the top.”
Rich countries could solve their budgetary problems by cutting spending, which most politicians do not have the courage to do. Also, if these countries have a problem with the way multinational corporations are taxed, they could change other policies like transfer pricing rules. What they shouldn’t do is tell other countries how income should be taxed within their own borders, let alone set up a global tax cartel.
The average taxpayer may feel indifferent to this development. But beware: this cartel is just the start. Once such a system is in place, it is only a matter of time before income-hungry lawmakers extend the minimum tax rate to individuals.
Véronique de Rugy is the George Gibbs Chair in Political Economy and Senior Research Fellow at the Mercatus Center at George Mason University.