President Biden’s international tax scheme discourages investment, harming those he seeks to help.
The G7’s agreement on U.S. President Joe Biden’s global minimum tax is a looming threat to international tax competition at a time when it is needed more than ever. Now that the world’s major economies have agreed to the key principles of Biden’s proposals, there will no doubt be immense pressure on the rest of the international community to sign up, too. For the sake of economies across the globe, let’s hope this misguided tax scheme is met with resistance.
Two pillars constitute Biden’s plan. The first pillar involves taxing 20 percent of every multinational corporation’s profits over a 10 percent profit margin at the corporate tax rate of the nation in which it makes its sales. This would have a large impact on organizations such as Facebook, which currently don’t primarily pay taxes where they make their sales. The second pillar involves taxing the overseas earnings of companies which are headquartered elsewhere at a 15 percent minimum rate. For example, if a company was taxed at 5 percent in one nation, but was headquartered in another nation, then adopting the global minimum rate would see that company pay a further 10 percent of its profits to where it’s headquartered.
These plans will do significant damage to the global economy. According to the Tax Justice Network, the 15 percent proposals can be expected to raise roughly $275 billion globally. Nevertheless, when corporate taxes rise, shareholders see lower returns, consumers pay higher prices, and workers earn lower wages. And while high prices and low wages hurt momentarily, lowering returns on capital impoverishes entire economies for years to come.
Capital accumulation is the surest way to make a nation richer. Investments in technology and machinery make individuals more productive and therefore worth higher wages. Businesses often finance investments that allow for this growth by reinvesting profits. Biden’s plan to reduce post-tax profits will therefore most likely reduce investment, resulting in less capital accumulation and comparatively lower wages.
This is no fiction. According to some studies, the reduction in real rates of return is the main effect of corporate tax hikes. Indeed, an investigation by the Urban-Brookings Tax Policy Center found investment returns bear 80 percent of the burden of corporate taxes. Translation: corporate taxes stunt all economic growth, resulting in lower wages for all. Given the pandemic’s impact on the global economy, ensuring growth should be governments’ priority.
Nonetheless, the vast majority of the short term focused public still back increasing corporate taxes, particularly on organizations such as Facebook, Apple, and Amazon. According to YouGov polling, 61 percent of the British public back increasing taxes on businesses, which seems like a ringing endorsement for a global minimum corporate tax. That’s too bad, considering faith in Biden’s plan relies on the dubious assumption government spending does more good than capital investment.
That’s simply not the case.
Government spending is consumption, and as such it contributes little to raising productivity or wages (in any stable fashion). If the public truly wants their politicians to raise more for public spending, then their focus should instead be on increasing consumption taxes such as VAT. Unlike capital taxes, consumption taxation has no effect on investment. Public services funded by consumption taxes would have little effect on economic growth.
Unfortunately, public opinion is steadfast in wishing to raise taxes exclusively on corporations and the rich—precisely the two groups who plough most of their income into savings and investment, and therefore do the most to raise productivity. Is this just envy and pure self-interest? Or is it a lack of education in economics? I can only hope it is the latter.
So long as international tax competition exists, there is a limit to the amount of corporate tax which can actually be raised—irrespective of the public’s wishes. If low-tax jurisdictions exist and British corporate taxes become too high, headquarters or intellectual property can be moved, tax avoided, and capital protected from the hands of the democratic state. And though the public, clamoring for more public expenditure, sees this to be at odds with their interests, in reality it’s not. Off-shored profits allow for investment in capital goods, which are the ultimate drivers of wage growth. In the long term, low-tax jurisdictions that facilitate capital’s preservation ensure our future prosperity.
Sunak and Yellen surely know this to be true, so why are they advocating for a plan that will eradicate low-tax jurisdictions? That’s simple: It’s popular with electorates. Both are willing to damage their already pandemic-wrecked economies to look good for their (ill-informed) voter base.
If Western electorates insist upon more state spending, politicians must be honest in informing them of the most efficient means to raise such revenue, which is ultimately in their long term self-interest. All evidence points to consumption taxation being a far less damaging (though unpopular) solution. By threatening the existence of international tax competition, the G7’s plans will only impoverish future generations by reducing the capital stock. No doubt such plans will be popular, but that doesn’t make them right.