A global minimum corporate tax rate will discourage tax competition

Last weekend the G7 agreed to impose a global minimum corporate tax rate of 15 percent. 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.”

As the data from Cato shows, these allegations that corporate tax revenues have been going down are actually not true. 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.

But regardless, there is something very telling about the reasoning behind the global minimum corporate tax rate. The Biden administration is making this effort for a global minimum corporate tax because they understand how the capital market works. Capital is mobile –– much more mobile than labor is –– and therefore will always flow to areas where it is best profitable. Taxes are one of the factors that affect capital allocation –– high taxes deter capital inflow and encourage capital flight and low investment.

Ireland, for instance, has been very successful in growing its economy in the last couple of years. And one of the possible reasons for that is the country’s low tax rates that have made it a very competitive place for doing business. Ireland’s low corporate tax rates are therefore a threat to any plans to raise corporate taxes in the United States.

Competition in the economy is however a good thing. It spurs innovation and entrepreneurship and grows the economy. A competition across countries or states for businesses especially encourages better economic policy. Currently, the US corporate tax rate is much in line with other OECD tax rates. A hike in US corporate taxes alone will render our country less competitive in the international market.

This is why our politicians would rather force high taxes on other countries rather than strive to make the US more competitive.