Last week, finance ministers from the G7 group of wealthy countries agreed in London to take the next step in creating an international tax cartel. The Biden Administration enthusiastically led the charge.
As Adam Smith wrote in The Wealth of Nations, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” And so, the finance ministers of the G7 met last week, capping their merriment and diversion by contriving a global cartel to raise taxes in what one commenter called an “OPEC for politicians.”
This particular contrivance came from the Biden Administration’s caving on President Donald Trump’s resistance to a decades-long push by the Organization for Economic Co-operation and Development (OECD) and the International Monetary Foundation (IMF) to install an international minimum tax that would hit not only American firms, but that would punish as “tax havens” governments such as Ireland’s, that dare tax too little. President Trump opposed the move as discriminatory against U.S. companies, and, hence, hurting American jobs, but President Joe Biden seems to think that is a price worth paying.
The G7 agreement is politically framed as making multinational corporations pay their “fair share” after decades of alleged tax-dodging. In fact, the OECD’s own research finds that corporations have paid a steady share of taxes as a percentage of gross domestic product (GDP) for decades now. This suggests that this agreement might be about something other than fairness.
Under the agreement, all countries commit to a roughly 15 percent minimum rate of corporate tax, but are free to go higher, as France has already hinted it may do. The Biden Administration had previously demanded a U.S. corporate tax of 21 percent.
Specifically, the proposal pairs a 15 percent minimum tax in each country in which a firm operates with an additional 20 percent tax on any profit above a 10 percent base margin, to be re-allocated to the governments of countries in which it makes sales. This last provision squarely hits innovative companies with valuable intellectual property, such as those in the technology, manufacturing, and pharmaceutical sectors. Further details remain scant, with little clarity on defining the tax base, no enforcement mechanism to ensure that countries actually follow through, and no time frame—tax treaties usually take years to finalize as lobbyists and special interests weigh in.
More concerning than the agreement itself is where it is going: to “build momentum” for next month’s trade talks in Paris that will include 135 countries accounting for roughly everybody on earth. G7 agreements typically dominate these trade talks, making it likely that the entire group of 135 countries will be pressured to adopt this tax agreement, and to adopt it with teeth: The OECD has long been eager to punish so-called tax havens, even Luxemburg and Switzerland, never mind countries with fewer friends in Paris. So global compliance with such a mandate is a very real possibility.
The Benefits of Tax Competition
It has been known for decades that tax competition is one of the best ways to limit government harm to the economy. Lower taxes raise incomes directly through lower tax bills, and indirectly through stronger incentives to create jobs, while reducing government waste. Moreover, tax competition is one of the most powerful tools for lowering rates domestically; President Trump relied heavily on international competitiveness to win his corporate tax reductions, which in turn benefitted American workers, consumers, and investors, with the strongest earnings gains going to low-income workers.
Indeed, one can see the benefits of tax competition clearly at the state level, as New York and California see that their high taxes are forcing businesses to Florida or Texas. California might dearly love to force Texas to raise taxes so that California can get back to raising its own—which is precisely what President Biden is agreeing to on a global scale.
Proponents of small government across the world depend on competition with other countries to encourage their own politicians to lower taxes for their own people. As it is, government spending is already out of control and rising fast; since 1950, federal spending as a percentage of GDP has more than tripled, from 11 percent to 30 percent. In the wake of the COVID-19 pandemic, of course, spending has now gone into overdrive. If international agreements now remove the last consequences for tax-hiking politicians, this country risks losing the guardrails altogether.
Taxes Start Small and Grow Big Fast
The damage may not stop at jobs. Just as the goal of any cartel is to raise prices and limit competition, once companies are “locked in,” the new G7 cartel could raise rates far beyond 15 percent. Indeed, it could raise taxes far beyond corporations, reaching to payroll taxes, individual income taxes, and beyond. After all, taxes usually start small: The federal income tax started with just the richest 1 percent of Americans paying a top rate of 7 percent, and today hits 70 percent of all workers at rates of up to 37 percent.
One might expect a global tax cartel to similarly expand ever-upwards and ever-outwards, perhaps reaching individual taxes, transaction taxes, carbon taxes, or whatever new levy bureaucrats dream up in Paris. Meanwhile, a future tax-cutting U.S. President may one day have to beg a roomful of European bureaucrats for permission to lower taxes on Americans.
The assumption underlying such tax agreements is itself a false one—the idea that tax competition, and the low taxes it brings, are a bad thing. Yellen herself criticized tax competition as a “race to the bottom.” But considering that every dollar in taxes comes from the pocket of the people, tax competition is a “race to the top” for the people, who have more money in their pocket along with stronger incentives to build, invest, and create jobs in their communities.
Indeed, business taxes themselves are something of a shell game, since any business, whether private, publicly listed, or an employee-owned cooperative, is owned by people. All corporations pay people, they produce products for people, and their shareholders are, ultimately, people. So, “taxing a corporation” is akin to “taxing a crowd”—it simply hides who is paying, yet does so in a particularly destructive way. Because business taxes necessarily pass on to workers, customers, and investors, the corporate taxes at issue here are among the most harmful taxes of all, with between 75 percent and 100 percent of the tax paid by workers. Unfortunately, it is also an easy tax to sell politically, making it the obvious choice for the cartel-builders in London and Paris.
Complete Failure to Understand How Economies Work
The mindset of tax-hikers comes from a twisted understanding of how an economy works. In their mind, every dollar taken from the people and handed to a bureaucrat makes a country richer. Janet Yellen’s own official statement gloats how the tax grab will make the global economy “thrive” specifically by raising government spending.
In fact, an enormous economic literature across hundreds of countries shows the exact opposite: Economies thrive when people make their own investments with their own money, and when parasitic government spending is kept to the absolute minimum. Yellen and her fellow bureaucrats have it precisely backwards.
Yellen separately praised the G7 agreement as showing governments’ willingness to address “the most critical challenges facing the global economies.” In the wake of historic deficits and trillions in poorly targeted aid that failed those in need, while governments banned jobs via lockdowns, decimated businesses via mandates, and panicked their way to levels of unemployment not seen since the Great Depression, it seems odd that the “most critical challenge” facing governments is grabbing a bigger piece of the pie at the expense of the people.
Perhaps someday, organizations like the G7 and OECD will develop an interest in good governance—how to promote innovation and growth, how to ensure safe cities, how to fix potholes within a year of being reported. Until then, these agreements are, in Adam Smith’s purest sense, a conspiracy against the public.
In order to protect the American people, the Biden Administration should:
1. Say No to the Cartels. If cartels created by private companies are harmful to the people, cartels created by government and enforced by law are an abomination. If the American people, via the states or the U.S. Congress, want to keep more of the money they earn, or want lower taxes to attract investment and jobs, they should not have to ask other countries for permission.
2. Encourage Tax Competition. Tax competition should be lovingly nurtured and protected as a clear expression of the idea that governments serve the people. Governments who limit what they take from the people should be rewarded, not punished. Rather than joining the cartels, the U.S. should pull out of, even sanction, efforts to hunt down and punish countries for taking less money from their people.
Going forward, Congress should be skeptical of any international agreements that are, too often, back doors to sneak laws past Congress and past the American people, who are the rightful sovereigns of the United States. This includes harmful environmental mandates, such as the Paris Accords.
Peter St. Onge is Research Fellow for Economic Policy in the Thomas A. Roe Institute for Economic Policy Studies, of the Institute for Economic Freedom, at The Heritage Foundation.