What a Global Minimum Tax Means—Economically and Morally
What will the Global Minimum Tax mean, economically and morally?
U.S. Treasury Secretary Janet Yellen and the financial leaders of the other G7 nations (Canada, the United Kingdom, France, Germany, Italy, and Japan) recently agreed to a minimum corporate tax rate of 15 percent, and they are currently working to convince holdouts in the G20 nations to join the agreement.1
According to current proposals, the global minimum corporate tax will require multinational companies with headquarters in any of the nations in the agreement to pay at least the minimum rate, no matter where their products and services are sold.2 For example, suppose a company headquartered in a participating country, such as the United States, is reporting sales in a country that is not participating, such as Barbados. Barbados currently has a corporate tax rate of 5.5 percent; if the United States agrees to a global minimum tax rate of 15 percent, the U.S. government would collect 9.5 percent of the company’s taxable income, “topping up” the company’s taxes to the minimum rate.3
The stated purpose of the minimum tax is to remove incentives for companies to relocate and avoid high taxes in their home countries. In Yellen’s words, developed nations must “end the pressures of tax competition and corporate tax base erosion,” which pose problems for leaders such as President Biden and French President Emmanuel Macron, whose policies and proposals include large schemes to be financed by taxpayers.4 Thus, the arguments in favor of corporate taxes mostly revolve around the narrative that large companies need to “pay their fair share” toward these programs. This is why Yellen insists we must end the "global corporate tax race to the bottom” by imposing a tax floor.5
However, Yellen and other politicians in favor of a global minimum tax ignore crucial truths, including moral and economic factors. Let’s consider the economic effects first.
Corporate taxes are damaging to a country’s overall economy. In 2012, the Tax Foundation conducted a review of twenty-six studies on the economic effects of taxes. It found that twenty-three of them support the conclusion that high taxes negatively impact the economy, and that corporate taxes are the most damaging.6 The Organization for Economic Cooperation and Development (OECD) also conducted a study on the effects of various taxes and found that corporate taxes are the most harmful for economic growth in terms of GDP per capita.7
Corporate taxes increase the cost of investing in businesses, thereby disincentivizing investors and making it more difficult for new companies to get started and for established companies to grow. Consider a 2018 study that found that a 1 percent increase in corporate taxes decreases investment by 4.7 percent.8 This is an instance of what Frédéric Bastiat called an unseen effect: People don’t invest as much in businesses, so businesses either never get launched or don’t reach their full potential. As a result, companies that could have come into existence and thrived don’t, their potential owners and managers don’t have the career opportunities they otherwise would, and customers are left with fewer options.
More important, and more fundamental, is the moral factor. All taxation—corporate taxation included—violates the rights of the people from whom taxes are taken forcibly. Although we can’t eliminate taxes overnight, we can recognize that taxation is already substantially harming corporations (and everyone else)—and that the only moral direction in which to move tax rates is downward.
A global minimum tax rate of 15 percent may not seem like much at first, given that most developed countries already have higher rates (notable exceptions include Ireland and Hungary).9 But European finance ministers have made it clear that this is just a minimum; the rate can be increased in the future—and this is clearly the intent of many of the leaders involved.10 At the beginning of the G20 negotiations, French Finance Minister Bruno Le Maire explained: “France is going to advocate for a global minimum corporate tax of higher than 15 percent, because this is the first time we can really put an end to the race to the bottom on international taxation.”11 Once the precedent of a global minimum corporate tax has been set, statist politicians will inevitably seek to increase their spoils.
Therefore, on both counts—economic and moral—the global minimum tax is a move in the wrong direction.