For several decades now, politicians around the world have tried to restrict tax competition to make it easier for them to increase tax burdens on their citizens without them fleeing to other lower tax jurisdictions.
The best way to achieve their goal is to create a high-tax global cartel. If implemented, the recent agreement of the G7 countries to impose minimum taxes on multinational companies would bring them much closer to this shady goal.
It’s no mystery why politicians don’t like tax competition. In a global economy like ours, individuals and businesses are better able to work and invest in countries with lower tax rates.
The ability to move residences and operations from country to country puts pressure on governments to keep taxes on income, investment and wealth below what politicians would like. Politicians in every country fear that higher taxes will cause high incomes and capital to move away.
Politicians denigrate this type of tax arbitrage with phrases like “race to the bottom” when every low tax country is called a “tax haven”.
These epithets are meant to mask the fact that this is perfectly legal and ethical.
It’s annoying for our lawmakers who want to spend as much of others’ money as possible, even if it means clawing back income earned outside our borders and / or preventing other countries from offering lower rates to people. companies wishing to do business within their borders.
Enter the global minimum tax, which seven of the richest countries in the world have just accepted.
In March, the White House described the proposal as a way “to encourage other countries to adopt high minimum corporate taxes, just like the United States, so that foreign companies do not have an advantage and that foreign countries cannot try to gain a competitive advantage by serving as tax havens.
There is little doubt that it is a question of limiting tax competition.
Here’s how it would work: In our current territorial system, the US government does not tax the income of foreign corporations (only the foreign government in which the income is earned does).
However, an overall minimum tax of 15% changes this as any profit made in a country with a lower rate would be taxed at a rate up to the minimum level of 15%. This means that US companies with foreign affiliates would have to pay at least 15% of their income, regardless of where they operate.
This analysis applies to all signatories to the agreement.
But for these G7 government officials, the real value of this deal is that it will facilitate intimidation – or at the very least, the exercise of strong political influence over – some 135 countries to get them to join their country. tax cartel of seven countries. . This is how cartels are born.
And make no mistake: Corporate tax cartels like this one wouldn’t be better for taxpayers than oil cartels are for consumers.
The great irony is that many pundits and politicians praise the deal as a victory for consumers and workers. The mistake is that, if the US government can get more money from businesses, for example, lawmakers can redistribute more money to the masses.
Don’t count on it. Academic research shows that imposing higher corporate taxes is a very destructive way to collect income because it reduces investment and, therefore, workers’ wages.
It also increases consumer prices. Plus, let’s face it, no nation has ever gotten richer and better through higher taxes and redistribution of wealth.
In fact, once you institute such a system, it is only a matter of time before income-hungry lawmakers (which no country in the world lacks) demand rates above 15%.
There is also the risk that they then demand that the system be extended to individual taxes. (The United States is terrible on this front, because we already have a global personal tax system.)
Hopefully low-tax countries will resist this pressure. After all, they should be free to decide how to tax income earned within their borders.
Also, if high tax countries think there is a problem with the current tax system for multinationals, they should first look at the rules they have in their own books that create this situation.
What they shouldn’t be doing is joining a global tax cartel.
– Véronique de Rugy is a principal investigator at the Mercatus Center at George Mason University, columnist for Reason review and Washington Examiner, and blogs on the economy for National exam. Click here to contact her and follow her on Twitter: @veroderugy. Click here to read the previous columns. The opinions expressed are his own.