Don’t bow to the call of the global tax cartel

When all you have is a hammer, everything does look like a nail. This is the best way to describe the unoriginal and often destructive thinking of government officials. Whatever the problem at hand, the answer is always more government spending. But more spending requires more taxation, which is not always easy to get in the modern global economy.

That’s how we get some U.S. officials’ current efforts to impose a global minimum tax. They are trying to capture more revenue from U.S.-based multinationals by limiting competition from countries with more favorable tax systems.

In 2017, the Trump administration improved the corporate tax system by lowering the top corporate income tax rate from 35% to 21%. At the same time, the global tax system (where income is taxed by the country where the company is located, regardless of where it comes from) was replaced by a territorial tax system. In this system, income is taxed only in the country in which it is earned.For example, a US company earning income in France is only taxed in France and not in the US

The new system is a huge improvement for American companies, which in turn helps repatriate their overseas profits here. It does, however, put pressure on politicians to further reduce tax rates and reduce incentives for companies to locate production abroad or shift reported profits overseas. Don’t forget that there are still many countries where corporate tax rates are lower than those in the United States.

Notably, in 2017, the U.S. also introduced a minimum tax called “Global Intangible Low Tax Income,” or “GILTI,” for companies that earn high returns overseas but pay low taxes overseas. It’s not a good idea, but it’s more valuable than what Treasury Secretary Janet Yellen is thinking right now – which is to levy a minimum tax based on a company’s global average tax rate rather than country-by-country.

If Yellen really believes what she says about taxing American companies, all she has to do is convince Congress to implement these so-called improvements. But she probably knows that raising interest rates will cause more capital to flow out of the United States, so she is resorting to coercing other governments to make their tax systems less attractive to American companies. Hence the idea of ​​persuading other governments to impose a global minimum tax rate of 15% on income earned by foreign companies within their borders.

Under this kind of national cartel, in which foreign governments promise to refuse to compete for capital by lowering tax rates, U.S. companies’ incentives to evade high U.S. taxes are severely diminished. The same goes for government incentives to keep their own tax systems modest.

Whether Yellen can persuade countries like China and India to agree to that is an open question. The proposal also faces political resistance from the European Union, which generally supports any attempt to hamper tax competition.

In the end, it’s unclear whether Yellen will be able to convince Congress to agree to her plan. That’s partly because enough lawmakers doubt that a global minimum tax can actually increase American prosperity, especially given the current fragility of the global economy.

This suspicion is justified. First, economists at the Organization for International Cooperation and Development looked at the impact of various taxes on economic growth in developed countries and found that corporate taxes “are most harmful to growth, followed by personal income taxes, and then consumption taxes.”

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

Third, while the revenue-increasing argument is often portrayed as a tool of fiscal responsibility, the reality is quite different. Numerous studies have shown that feeding the government beast with more corporate tax revenue will increase spending, not reduce government budget deficits. As my recent review of the literature with Mercatus Center economist Garett Jones revealed, more deficit spending could hamper economic growth.

In that case, why not give the hammer a break and get a new tool? A nice, sharp saw, for example, can help cut unnecessary spending in the budget and reduce the ongoing need for more revenue that would drive away corporate America.

Veronique de Rugy is the George Gibbs Chair of Political Economy and a senior fellow at the Mercatus Center at George Mason University.

US News.

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