The Biden Administration has cast its recent push for a global minimum corporate tax rate as a principled stand, an exercise in using multilateral agreements to coordinate a reshaping of the global corporate tax landscape. Ultimately, however, these appeals to a higher tax policy purpose are a load of bunk — the overriding goal is extracting as much money as possible.
In announcing the United States’ interest in establishing a global minimum corporate tax of 21 percent, Treasury Secretary Janet Yellen described her intent to halt a “race to the bottom” in which countries had to compete with one another through their tax code to attract business. But a race to the bottom in corporate taxes really only harms countries’ revenue collections.
After all, corporate taxes are one of the most economically harmful forms of tax collection. Not only does the incidence of the tax generally fall on labor, which bears 70 percent or moreof the burden of corporate taxes through reduced wages, but corporate taxes also hamper economic growth by reducing investment. Broadly speaking, competition between countries that pushes corporate tax rates down is a good thing.
Rather, countries falling in behind the United States on global minimum taxes want to be able to raise taxes with impunity. The appeal of a global minimum tax to countries like France (and, until the 2017 tax reform law, the United States) that assessed high corporate tax rates is the opportunity to have their cake and eat it too. With an effective minimum tax in place, high-tax countries could keep their high corporate tax rates in place and while at the same time making it difficult or impossible for companies to lower their tax costs by moving operations to another developed country.
The irony is that these self-interested motives are exactly why efforts at a multilateral agreement establishing a global minimum tax rate are doomed to fail. As Joseph W. Sullivan argues, the incentives in any such agreement are the opposite of those in a multilateral trade deal.
When a single country is deciding whether to join a regional trade agreement, for example, the incentives all align to push that country towards joining, especially as more of its neighbors do. Should that single country not do so, its economic competitiveness would be harmed to a far greater extent than the other members of the trade agreement.
On the other hand, when it comes to a multilateral agreement to respect a global minimum corporate tax rate, holdout states only benefit more as other countries join. Ireland, for example, has for many years has benefited from its low corporate tax rate — so much so that the European Union Tax Commission recently attempted (and failed) to fine Apple $13 billion for receiving “tax incentives” from the Irish government simply because the Emerald Isle’s corporate tax rate was low. As more developed countries raise their corporate tax rates, Ireland’s tax environment will only look more and more attractive to businesses seeking new homes.
Now, the United States is making the exact same mistake all over again, seeking to neutralize the “threat” of Ireland’s low corporate tax rate by preventing businesses from benefiting from it, not by making its own tax structure more competitive. President Biden’s recent infrastructure proposal includes provisions to tax overseas business activity through increases to taxes on global intangible low-taxed income, or GILTI.
Governments are trying their hardest not to learn their lesson, and the push for a global minimum corporate tax represents the latest gymnastics to avoid the obvious conclusion: it’s better to simply make your tax code competitive.