The Global Tax: Another Horrendous Economic Proposal from the Left

By
Victor Arredondo
on
June 4, 2021
Category:
Economic Policy

The nation is still within the initial phases of the Biden Administration and the U.S. Treasury Secretary, Janet Yellen, is wasting no time in proposing unpragmatic fiscal policy. On April 5th, Secretary Yellen announced that she will begin speaking with other nations about implementing a global minimum corporate tax. Yellen aims to “make sure the global economy thrives based on a more level playing field” with this policy. This is promising and seemingly sincere rhetoric promulgated by Yellen; however, as this article will explain, there are far too many flaws within this tax for it to see any remote success from the Secretary’s standpoint of economic growth. Within this very statement, it is oxymoronic to suggest economic thriving in conjunction with a “more level playing field”. Developing and poorer countries could see the decreased potential for revenue.  The incentive to join this accord is infinitesimal for a bevy of nations, which will prove to be the policy’s predicted failure. Governments will see increased revenue to undoubtedly waste, as usual (especially the U.S.). Corporations will lose growth along with additional aid to workers. Additionally, corporations lose the artificial liberty to explore and divert their businesses to nations that provide better tax rates for which the latter statement is prevented. The United States and the Biden Administration are cultivating a route to lose its own taxation autonomy whilst creating disastrous effects in the process due to this policy.

So, what exactly is a global minimum corporate tax? Essentially, a global tax regime is when all the industrialized countries decide to set a minimum tax rate for corporations, therefore forcing corporations to pay the tax no matter where they organize. First, let us debunk the concept of international incentive to join this policy which will consequently result in the failure of obtaining the mission of a global tax. We will start with a hypothetical. Imagine this policy is adopted, in addition to the United States, by France, Germany, Brazil, Norway, and Puerto Rico. For reference, the Committee for a Responsible Federal Budget reported the previously stated nations to be among the highest conflated tax rates in the world, as they are significantly above average. Therefore, it makes this hypothetical more plausible. It should also be noted that most of these nations are fairly advanced and at the least they are industrialized and developed countries. With that said, this cohort decides to set the global corporate minimum tax rate at 30% via the average of their own collective corporate tax rates. According to the Tax Policy Center, The Tax Foundation, and Trading Economics, the United States resides at 21%, Brazil at 34%, Norway at 24%, France at 32.02%, Puerto Rico at 37.5%, and Germany at 30%. With this policy implemented, any corporation that inhabits any of these nations will thus be required to pay a 30% tax rate. Now, the largest created percentage deficit is an increase of current national corporate tax to averaged hypothetical corporate tax, which is 9%. That 9% increase is coming from the United States, and seeing as how it is the nation proposing this policy, there would likely be no protest to this increase. Again, since that is the largest increase in percentage and the rest of said countries are within even closer proximity, this hypothetical becomes even more feasible. The incentive for these countries is not at a null state. In fact, for four of these six nations (not the United States or Norway), there are actual benefits. With their corporate tax rates being lowered, they will likely see a boost in attraction from corporations compared to their previous appeal of higher rates. However, the United States and Norway would likely see a decrease in the amount of corporations willing to pay their tax rates as the nations will be going up at 9% and 6%. But let’s think about the incentive for other nations to join this regime. Does a nation like Hungary (9%), Barbados (5.5%), Paraguay (10%), or Ireland (12.5%) have incentive to join in the unity? Based on fundamental market functions, there is absolutely no substantial incentive for a nation that has a relatively low corporate tax rate, in the case of the hypothetical, any rate under 30%, or any developing nation to enter into this united taxation policy. Economics 101 will tell you that the owner/investor will almost always choose the location where they are paying less for being there. If you are a smaller country that is trying to grow and your only draw is your low tax rate, why would you sacrifice that? Regarding economic growth, it does not make any sense that a developing or mid to bottom bracket developed nation would sacrifice its only incentive for corporations to come and promote economic growth. Take a trade deal for example, generally the more nations that join the deal, the more growth and flourishing there is. However, in the case of the global tax, the more countries that stay out of the regime and keep their rates low, the more that the outsiders will thrive as more countries join. As Joseph Sullivan with Foriegn Policy writes, 

Take Ireland, which has become a favorite location for global multinationals in part because of its very favorable tax code. If a small country like Ireland stayed out of a free-trade regime like the European Union, it’d be shooting itself in the foot. On taxes, however, staying out of any global tax deal would ensure it can still have a tax code that allows it to remain more attractive to global corporations than most countries. That means Ireland will likely fight tooth and nail to stay out of any global minimum tax regime. (Sullivan)

Still using Ireland as an example, Chris Edwards at the Cato Institute says, 

If Yellen is concerned about fairness, she should rethink her idea of imposing a global minimum corporate tax rate. That would be an arrogant move by a big and powerful country such as the United States. The corporate income tax is an inefficient tax, and so poor countries that want to attract investment and grow should cut them. Just a few decades ago, Ireland was much poorer than Britain, but its implementation of a low corporate tax rate has helped the Emerald Isle grow strongly and surpass Britain in living standards. Yellen’s approach would unfairly deny small and poor nations the ability to adopt Ireland’s powerful reform approach. (Edwards)

Thus, my point regarding fairness and economic growth for smaller and poorer nations has been stated. If any of these nations joined this regime they would undoubtedly become grotesque in the eyes of corporations looking to plant there, and they would lose their only draw for corporations. Secretary Yellen’s proposal is utterly counterintuitive to the basic notion of fairness and economic growth particularly for smaller, poorer, and developing/bottom tier developed nations by undermining their growth prospects.

Another aspect and consequence of the global minimum corporate tax rate is the effect the policy will have specifically on the corporations. Market fundamentals were seemingly null when the administration developed this policy. If you artificially increase the price of doing business, that has some fairly mainstream effects within the economy. If you boost the amount of tax that corporations will pay regardless of where they are located, all that is going to do is lead to price inflation. The corporations have to make up the increase in taxation somehow in addition to normal market affairs. Subsequently, that will turn into job loss and lack of demand. The notion that increasing a global minimum tax is inherently increasing innovation, fairness, and prosperity is utterly ridiculous. It is quite literally the taking away of money from the individuals who actively create innovation and develop this collective flourishing. The less these corporations are taxed, the more they can produce new and better products which will generate demand. Supply does effectively generate its own demand; therefore, if these corporations can create this innovation and escalate the quality of goods and services, they can afford to expand with the new found demand. This expansion will inherently include more jobs and higher wages. This seems like individual flourishing, fairness, and economic growth, no? As Ludwig von Mises, a German classical liberal economist and the father of the Economic Calculation Problem (along with many other notable achievements) said, 

If the present tax rates had been in effect from the beginning of our century, many who are millionaires today would live under more modest circumstances. But all those new branches of industry which supply the masses with articles unheard of before would operate, if at all, on a much smaller scale, and their products would be beyond the reach of the common man. (Mises Institute)

Inversely, the higher global minimum corporate tax rate of demand side economics would simply redistribute these collected taxes into social programs and back into the economy. If prices from corporations do not inflate, jobs are not lost, and demand does not decrease the economy might be fine (They will but for sake of argument…). But, a “fine economy” is clearly missing its driving market factor: the promotion of individual flourishing through innovation and escalated quality of commodity production. The products simply will not be getting any better, nor will the high rate innovation come to fruition. Essentially, it is not desirable for corporations to lose this artificial liberty to choose lower national corporate tax rates for further growth. If you want to create a depression, raising America’s fairly low and provenly prosperous tax rate (21%) to a higher global rate would be an effective way of doing that. Now, let’s look at some of the largest Real GDP (adjusted for inflation) increases in history. The subsequent data is in accordance with The Tax Foundation, Statista, and The Economic Policy Institute. In 1955, Former President Dwight Eisenhower lowered the effective corporate tax rate by 14% and the nation saw a 7.6% increase in Real GDP. In 1959, Eisenhower lowered the tax rate again and saw a 7.8% increase in Real GDP. In 1962, Former President John F. Kennedy, a Democratic proponent of supply side theory, cut the corporate tax rate by 7% to effectively 35%, which led to a 5.9% increase in Real GDP. In 1965, the same administration brought the rate down to effectively 29% with 6.2% growth. In 1984, Former President Ronald Reagan brought about the largest Real GDP boom since 1959 with a 15% effective corporate tax cut to Carter’s stagflation ridden economy. Reagan brought the rate down to 33% and saw 6.9% growth. Just recently, with Former President Trump’s “Tax Cuts and Jobs Act of 2017”, where the corporate rate was slashed from 39% to 21%, there was a collective 7.5% increase in Real GDP through fiscal year 2019. It is indisputable that the largest Real GDP increases occurred when the effective corporate tax rate was lowered significantly. Why would we want to do the inverse but on a global scale?

Finally, there is the undisclosed awaited question, “Could the United States of America lose its own taxation autonomy?”. Well, in all likelihood, yes. Essentially, if America pushes forward with this, in the long run, taxation autonomy will be lost. The advocate of the global tax is assuming it is always going to be the United States making these rates and generating this fairness. But what happens when our rates do not suit the other nations? Well, they will band together with their global economic counsel and collectively set the tax rates for the entire Western Hemisphere. Therefore, the U.S. will lose autonomy to set our own tax rates. Other countries are not just going to go along with the U.S. because Secretary Yellen wishes them to — they are only going to do so if they gain leverage. The way they gain leverage is by creating a new economic structure in which all the nations collectively set the tax. They are going to increase the interconnection of all economic policy with a bevy of countries who have wildly different social structures and vastly different spending packages and structures. These sensitive structures require careful and articulate management of that nation’s fiscal policy. This includes how much revenue it seeks to bring in from corporations versus how economically attractive it desires to look in the eyes of corporations. Logic refutes this blending of structurally heterogeneous nations with the same component of fiscal policy being a global corporation tax. 

Demagoguery from the Biden Administration is infecting the constituency of the United States. Do not be fooled by the emotionally charged tones and rhetoric from Secretary Yellen. It is hard to not sympathize with Yellen when she says her goal with the global tax is to, “make sure the global economy thrives based on a more level playing field”. However, to quote Mises once more, "Nothing is more calculated to make a demagogue popular than a constantly reiterated demand for heavy taxes on the rich. Capital levies and high income taxes on the larger incomes are extraordinarily popular with the masses, who do not have to pay them” (Mises Institute). As Mises said, the masses might not have to pay these taxes, but they will undoubtedly feel the effect of them being implemented. Let us not fall prey to demagoguery within our nation’s economic policy and remember these proposals come the subsequent election cycle. 


Works Cited

Asen, Elke. “Corporate Tax Rates Around the World.” Tax Foundation, Tax Foundation, 9 Dec.

2020, taxfoundation.org/publications/corporate-tax-rates-around-the-world/. 

Department, Published by Statista Research, and Mar 17. “Real GDP Growth Rate by Year in the

U.S.” Statista, 17 Mar. 2021, www.statista.com/statistics/188165/annual-gdp-growth-of-the-united-states-since-1990/. 

Edwards, Chris. “Janet Yellen Is Wrong on Tax Competition.” Cato Institute, 8 Apr. 2021,

www.cato.org/blog/janet-yellen-wrong-tax-competition?queryID=9e37fbc09873e894339f91f9853d8f56. 

“How Do US Taxes Compare Internationally?” Tax Policy Center,

www.taxpolicycenter.org/briefing-book/how-do-us-taxes-compare-internationally. 

“Is the U.S. the Highest Taxed Nation in the World?” Committee for a Responsible Federal

Budget, 30 Oct. 2016, www.crfb.org/blogs/us-highest-taxed-nation-world#:~:text=Again%20according%20to%20the%20OECD,income%20rate%20of%2039.6%20percent. 

Report • By Thomas L. Hungerford • June 4. “Corporate Tax Rates and Economic Growth since

1947.” Economic Policy Institute, www.epi.org/publication/ib364-corporate-tax-rates-and-economic-growth/#:~:text=The%20U.S.%20corporate%20income%2Dtax,to%20be%20impeding%20corporate%20profits

Sullivan, Joseph W. “A Global Minimum Corporate Tax Is a Bad Idea Whose Time Hasn't

Come.” Foreign Policy, Foreign Policy, 12 Apr. 2021, foreignpolicy.com/2021/04/12/global-minimum-corporate-tax-janet-yellen-bad-idea/. 

Tho. “Ludwig Von Mises's 9 Best Tax Quotes: Tho Bishop.” Mises Institute, 15 Apr. 2016, mises.org/wire/ludwig-von-misess-9-best-tax-quotes. 

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