This is a terrible idea. This “race to the bottom” is what drives efficiency and better ways of doing things. It’s why we don’t have $10,000 desktops in our homes with 386 processors.
If computer chip manufacturers decided to create a floor price for their products that would be collusion and bad for consumers. Same here. It’s bad for citizens of a country.
You damn know some developing country is going to be told “nah, sorry, can’t lower your corporate tax rate too low to spur investment, those jobs are staying in developed countries”.
First, tax competition creates its own inefficiencies —- companies locate production in low tax jurisdictions instead of optimal locations given local skills, factor prices, etc.
Second, this argument only makes sense if you think tax competition leads to “innovation” in tax policy, but it’s not clear why that would be the case. Almost any kind of tax structure is jurisdictional and would be undone by zero-sum competition between countries.
Third, would this hurt developing countries? Right now this is a voluntary agreement between developed countries to achieve a common goal, so that complaint isn’t super relevant. Think of multilateral tariff reduction agreements —- it’s often a good idea to unilaterally put up tariffs if everyone else lowers them, which can result in a high-tariff equilibrium even if each player would like lower global tariffs. Multilateral agreements are the way to achieve the collectively desired outcome that can’t be achieved in a decentralized way.
But a global minimum tax could be also be a good idea for lower income countries, if it’s not set too high. Typically the economic incentives are there to locate especially production in the developing world. If all developing countries had the same minimum tax, then companies couldn’t play developing countries off one another to get lower tax. Lower income countries would reap more gains from globalization and have more funds to eg invest in infrastructure and development.
First, companies don’t optimize for tax at the exclusion of everything else. And calling tax optimization and inefficiency is interesting considering it directly impacts returns.
Second, the innovation isn’t in the tax policy, it’s in the use of the tax revenue. If I come up with a less bureaucratic and less costly administrative process for companies, why shouldn’t I pass the along if I want to?
Third, the implementation goal is global. That’s been stated by Biden.
And I’m guessing the lower income countries will suffer. You want to pay t a similar tax rate for the US for say Myanmar? Abundant corruption, questionable private property rights, untrustworthy courts?
On (1), I’m speaking from an allocative efficiency standpoint (should have been more precise). For example, say I’m a company selling in NY, I can locate production in NJ or AZ, and pretax it is cheapest to locate in NJ. If AZ offers a tax incentive that makes it cheaper for me to locate in AZ I’ll do it, but if you sum up pretax revenue minus costs they are lower than had I located in NJ. So this is a transfer from NJ coffers to company profits + AZ coffers, but it is negative sum.
Not sure I understand what you’re saying on (ii). I think you’re saying that if countries have to compete for business, then, holding fixed their statutory tax rate, they have an incentive to improve bureaucratic efficiency to increase resources available (given the statutory tax rate). But I think the issue is you get competition on the statutory rate, which pushes rates towards zero. I actually think a minimum tax which binds and hence constrains the statutory rate could provide a great incentive along the lines youre talking about to optimize bureaucracy.
On (iii), I’m guessing a minimum tax wouldn’t bind in countries willing to explicitly expropriate FDI. Also having a minimum could limit the scope to vary effective rates for individual companies as carrots / sticks, which if anything could reduce corruption.
If it would be only for the complex tax evasion schemes I would be on their boat but in the end it will reduce competition between countries which is just dystopic.
To add to that, there structural problems with an income tax in general, and a corporate income tax in particular, and there are many arguments for eliminating it altogether, and replacing it with other types of taxes (e.g. a transaction tax, a carbon tax, a land tax, etc). But this locks it in place as a constant for all countries.
This is just G7 isn't it? Seems to me like all the typical very low tax jurisdictions you'd select for as somebody optimizing tax with the freedom to locate wherever you choose are still open.
This is the first step. G7 can then strongarm or cajole their "client states" with coordinated action. Even just the fact that such action is finally happening, is a great step. This was considered a sci-fi scenario 20 or 30 years ago and now it's become reality.
It's one thing to get G7 to agree on something when they're literally in the same club, another to get their client states that might previously have been attractive options like Ireland or Estonia to get on board to some degree. But jurisdictions that are much more independent and less prone to leverage like Georgia or Malaysia on the other hand I just don't see it. And that's before you get off into the weeds of jurisdictions that are more accurately described as oppositional and are raising their own efforts to attract offshore investment which it seems would be even less likely to kiss the ring.
It's easy to forget that the legacy brand countries with the extremely high tax rates and absurd conditions like citizenship based taxation in the most abhorrent cases internationally are the exception, not the rule. Their residents with their political biases make up the majority of participants in forums like this, and this contributes to the perception that their regime is enormously more widely adopted than it actually is, but if you look at the actual numbers by the actual areas that's just not the case.
And worst case scenario then you have crypto, where it goes from the legally difficult realm into the technically impossible realm.
This is just a fight they're guaranteed to lose on a long enough timeline.
Low-tax countries in the EU are being ruthlessly isolated already. This has been happening for some 15 years now, and accelerated after Brexit; covid might well be the nail in the coffin.
I am also sceptical of your claim that jurisdictions like Georgia and Malaysia are "less prone to leverage" - their proximity to large adversaries actually makes them more dependent on soft-power diplomacy to maintain big friends.
Obviously the likes of Russia and China might not play ball - but they have much bigger issues to worry about, from a capitalistic perspective. You put your money into China, you can't pull it out ever again; you put your money into Russia, and tomorrow it might well be Putin's money.
> Low-tax countries in the EU are being ruthlessly isolated already.
In what way? How is life for anyone in say Ireland or the Netherlands or the Bahamas materially different than, say, 20 years ago? Are they not allowed to travel somewhere? Obtain visas? Purchase goods and services from abroad? Are airlines refusing to land there? Even a single example of this "ruthless isolation" would be nice to show, otherwise, I suspect this is more of a dream sequence than a description of reality.
> their proximity to large adversaries actually makes them more dependent on soft-power diplomacy to maintain big friends.
Considering how the west interacted with the Crimea takeover I'm pretty sure these countries have realized by now that the west doesn't really care about their protection.
> This has been happening for some 15 years now, and accelerated after Brexit; covid might well be the nail in the coffin.
Estonia will be a useful barometer to keep an eye on for this in the future, but since their tax rate is actually basically in line with this floor anyway it may well be that this just doesn't affect them at all.
> their proximity to large adversaries actually makes them more dependent on soft-power diplomacy to maintain big friends.
Georgia already has recent experience with such relationships not keeping the bear at bay so may well view the extra capital from remaining an attractive tax friendly jurisdiction as more useful than bowing to parties who have already failed them in the recent past.
Malaysia seems even less likely to buckle to the "international order" as they have neither the cultural homogeneity nor the magnitude of the threat that Georgia has.
> You put your money into China, you can't pull it out ever again; you put your money into Russia, and tomorrow it might well be Putin's money.
When what your money gets you is absolutely nothing, one parasite is just as bad as another in the long run, it just becomes a question of which one costs you more. Russia and China have to restrain themselves in the looting sector less and less to the extent that their US & EU competition go all out in order to look like better alternatives.
And then, there's the implications of an extortion war across the global economy providing capital flight impetus to push the cryptosphere to obscene heights and complete inability to tax in a worst case scenario.
I think the fundamental fact of the issue will remain that as long as it's a forced payment not linked at all to delivery or quality of goods or services, all rational parties will be forever motivated to avoid it to the maximum extent possible, as it resolves to nothing more complex than "burning money" given what it actually buys you.
If computer chip manufacturers decided to create a floor price for their products that would be collusion and bad for consumers. Same here. It’s bad for citizens of a country.
You damn know some developing country is going to be told “nah, sorry, can’t lower your corporate tax rate too low to spur investment, those jobs are staying in developed countries”.