A global minimum corporate tax rate will discourage tax competition

Last weekend, the G7 agreed to impose a global minimum 15 percent corporate tax rate. In addition, they also “agreed to reallocate the earnings of some multinational corporations if too much was deemed to be in low‐​tax countries”.

This is one step towards the Biden administration’s goal of a global corporate tax. According to Treasury Secretary Yellen, having a one-tax rate will ensure countries do not compete with each other in offering low tax rates to businesses.

At the G-7 meeting, U.S. Treasury Secretary Janet Yellen alleged that the agreement would “end the race to the bottom in corporate taxation and ensure fairness for the middle class and working people in the US [and] around the world.” And she said recently that a global minimum corporate tax is “about making sure that governments have stable tax systems that raise sufficient revenue.”

A Bloomberg story fawning over Yellen said the new agreement “would signal an end to decades of nations racing each other to lower levies, eroding their collective revenues.”

Unfortunately, however, not only is the minimum global tax based on faulty assumptions, but evidence indicates that it will reduce tax policy competition among countries, likely stalling growth.

As evidence from Cato shows, while minimum tax supporters allege that tax revenues have been going down, that is not supported by the data. Tax revenues as a percentage of GDP have stayed constant over the years. This is a fact we outlined in our report — tax revenues are more a factor of economic growth than tax rates.

Capital is indeed mobile — much more mobile than labor. For that reason, capital will always flow to areas where it is most profitable. Often enough, absent other considerations, low-tax areas tend to attract more capital compared to high-tax areas. So, at least minimum global tax enthusiasts understand that high taxes deter capital inflow, reducing investment. Ireland, for instance, has seen its economy grow substantially in recent years. The country’s low taxes have played a significant role in making it a very competitive place for doing business.

Competition is good for consumers

Competition in the economy is a good thing. It spurs innovation and entrepreneurship, growing the economy.

Similarly, competition among countries especially encourages better economic policy. Currently, the US corporate tax rate is much in line with other OECD tax rates. Raising it will render the country less competitive in the international market. It should be concerning that our politicians would rather force high taxes on other countries than strive to make the U.S. more competitive.