Earlier this month, U.S. Treasury Secretary Janet Yellen opined that we are on a global race to the bottom in corporate taxation. Yellen is worried that countries are on the path towards ever-lower corporate tax rates, which would be problematic in her eyes because without stable tax systems, we would not be able to fund "essential public goods." With a global minimum tax, such a tax regime would mean that a multinational company pays the same minimal corporate tax rate, regardless of which country they are located.
Yellen wants an equitable system in which there is a "more level playing field in the taxation of multinational corporations, and spurs innovation, growth, and prosperity." From Yellen's point of view, it would mean less tax evasion and greater tax competition. It's nice to throw around such lofty words as "equitable." The Governor of Illinois tried it in 2019-2020 when trying to pass the "Fair Tax," a failed attempt to convert the State's flat income tax into a progressive tax. The problem is that such exalted language is a guise that covers up the myriad issues with global minimum taxation.
Is There Really a Race to The Bottom? There are some smaller countries with 0 percent corporate tax, and yes, global average of the corporate tax rate has dropped since 1980. But has there been a race to the bottom? According to the Tax Foundation's report on 2020 corporate taxes, 140 out of 197 countries (or 71.0 percent) have a corporate tax rate between 20 and 30 percent. The worldwide average is 23.4 percent (25.9 percent when weighted by GDP), while the unweighted global average is 23.5 percent for OECD countries. The rate are not as high as they were in 1980 (at around 40 percent global average), but they began to plateau in the past decade. Plus, if there were a race to the bottom, [nearly] everyone would be doing it. What we see is that only nine countries lowered their corporate taxes from the 2019 to 2020 calendar year (Tax Foundation). A far cry from "race to the bottom."
What about corporate tax revenues? You would think that with Yellen's rhetoric, a lower corporate tax rate would mean less tax revenue. The libertarian Cato Institute collected the data of 22 OECD countries dating back to the year 1980. Cato found that as corporate tax rates fell, corporate tax revenue as a percent of GDP generally increased. Why? Because lower corporate tax rates meant increasing business activities that subsequently generated more income. Since "sufficient tax revenue" was one of Yellen's perceived gripes, the fact that reality is contrary to Yellen's perception undermines Yellen's case.
Why the Corporate Tax Is Such a Poor Life Choice. Whether there should be tax harmonization is another discussion for another time. But out of all of the taxes you could have chosen, why the corporate tax? To quote the OECD from a past report, the same organization now helping Yellen to create this taxation system, "corporate taxes are found to be the most harmful for growth." As I have documented before (see here and here), the corporate tax is one of the worst taxes, and not just because of its effects on economic growth. It reduces productivity of labor, disincentivizes investment, creates a double taxation effect, creates a huge tax burden, and results in a majority of the tax incidence paid by laborers (Tax Foundation, 2017). What is the point of talking about a corporation's "fair share" when most of the tax is paid by the everyday worker?
So What If Corporate Tax Rates Are Lower? As already outlined, higher corporate tax rates do not mean more revenue. If the past forty years have taught us anything, it is the opposite. There is greater tax revenue, which is a win for the government. It is a win for shareholders because they earn more profit. Lowering the tax rate is also a win for workers since they pay most of the tax incidence of a corporate tax.
A lower corporate tax rate is a competitive advantage in the global marketplace. As one example: according to a study from Ernst and Young, the U.S. companies lost $510 billion in the mergers and acquisitions from 2004 to 2017 because they were inadequately positioned when it came to corporate tax competitiveness. Less developed countries use a lower corporate tax rate to attract investment and help along with economic development so they can compete in the global market. Just ask Ireland or Paraguay. And let's consider that nations might want to lower the corporate tax rate to balance between the priorities of collecting revenue and minimizing the aforementioned harms that the corporate tax causes.
Political Feasibility. Ask yourself who stands to benefit from such an arrangement. It wouldn't be countries with lower corporate tax rates (e.g., Ireland, Paraguay). It would be those who already have higher corporate tax rates, such as France and Germany. Although the U.S. federal corporate tax rate is 21 percent, keep in mind that President Biden is looking to raise the tax rate to 28 percent, which is above the global average rate. It's as if the United States wants the revenue, and is willing to strong-arm other countries out of their competitive advantage to get it. Also, taxation is one of the privileges of sovereignty. Another reason that it is unlikely to happen: because it means up giving up power (not to mention greater tax revenue). There have been efforts towards corporate tax harmonization in the European Union, but to practically no avail (Chelyadina, 2019). If you cannot even get a monetary union to cooperate in tax harmonization, what makes you think that you will get the rest of the world to do so? And none of this even gets into implementation hurdles (Tax Foundation), but I digress.
Conclusion: To recap, there is no race to the bottom. Corporate tax rates were too high, and the data suggest this by showing a correlation between lower corporate tax rates over the years and higher corporate tax revenue as a percentage of GDP. Countries with lower corporate tax rates enjoy competitiveness in the global markets, and they will be hard-pressed to give such an advantage up. Heaven forbid if other countries compete with the United States in the global marketplace! Winston Churchill once said that a trait of socialism is that it is the gospel of envy and that its inherent virtue is the equal sharing of misery. It looks like Yellen wants to share the misery equally, except within the narrower context of corporate taxation.
Forcing other countries to raise their corporate taxes and create a de facto cartel isn't going to do anyone any favors, especially given the harmfulness and inefficiencies of the corporate tax. Plus, it ignores the fact that fiscal spending in the United States has gotten out of control. In 2020, we spent $5.3 trillion in coronavirus-related spending. This year, the Democrats were able to get a $1.9 trillion so-called "relief bill." Biden is now proposing $2.3 trillion in additional fiscal spending for a supposed infrastructure bill in which less than 30 percent of the spending has to do with traditional infrastructure. My advice to Yellen and Biden is this: cut back on fiscal spending and create a tax code that spurs U.S. competitiveness in the global marketplace instead of hindering it.
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