by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Over the past 30 years, corporate-tax rates have fallen across the developed world. Advanced economies have woken up to the fact that lower marginal rates encourage entrepreneurship and attract foreign direct investment. Political leaders have reasonably attempted to make their countries more attractive — a trend that has been described as a “race to the bottom.” In a recent speech, U.S. Treasury secretary Janet Yellen called for a rejection of this race. Rather than pursuing a competitive tax policy, Yellen is advocating a new global minimum corporate-tax rate to ensure all nations tax corporate profits fairly. But Yellen’s plan is misguided. In fact, it would hurt the citizens of all nations party to such an agreement.
In her speech, Yellen explained that the pressures of tax competition have prevented countries from enjoying full sovereignty over fiscal policy. If countries wish to spend more, and fund that spending with high corporate taxes, then they risk companies’ offshoring their profits and taking away any revenue that governments might gain. Countries such as Ireland, Moldova, and Paraguay have adopted extremely low rates to attract businesses to their shores. This has helped them compete with richer nations internationally, but has also resulted in a drop in American tax revenue, as companies move their profits toward these “havens.”
For Yellen, that simply won’t do.
But a global minimum tax isn’t the way to fix these problems. While countries’ abilities to raise corporate taxes is restricted by the fact that companies may offshore profits (and that may be problematic for governments in high-tax countries), that is a feature, not a bug. This economic phenomenon is well-known. It’s just called the Laffer Curve.
If governments tax beyond the optimal rate, then revenues will start to fall.