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U.S. Treasury Secretary Janet Yellen’s call for a global corporate minimum tax is being hailed in some quarters as a return to American leadership. That’s one word for it, I suppose.

Speaking to the Chicago Council on Global Affairs on Monday, Ms. Yellen called for an end to the “30-year race to the bottom on corporate tax rates.” An agreement among nations to impose a minimum rate of tax, she said, would “end the pressures of tax competition,” ensuring that governments can “raise sufficient revenue to invest in essential public goods.”

What she is proposing, in sum, is a global tax cartel. Rather than compete with each other to attract private capital, governments would collude with each other to extort it. There are all sorts of practical problems with this proposal, but let’s first examine why it’s such an awful idea in principle.

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Some background. In 2017, the United States cut its statutory corporate tax rate from 35 per cent – the highest in the world – to a more middle-of-the-pack 21 per cent, as part of a broader suite of tax reforms. The Biden administration now proposes to jack it back up to 28 per cent, the better to finance its $2.3-trillion American Jobs Plan.

Recognizing the threat this poses to American competitiveness, the administration hit upon the ingenious scheme of getting the rest of the world to agree not to compete. It’s easy to see why some governments might think this was in their interests. It’s harder to see why it would be in the interest of their populations.

Competition in taxes is generally as beneficial as it is in most other walks of life. Governments otherwise would be tempted to raise taxes without end, especially on faceless corporations – who, after all, don’t vote. Competition with other jurisdictions acts as a check on Leviathan, in the same way as competition in conventional markets keeps corporations from raising prices at will.

That this has helped to reduce corporate tax rates over the years, from an average of roughly 40 per cent worldwide in 1980 to 24 per cent today, is more to be celebrated than bemoaned. Other things being equal, lower tax rates are to be preferred to higher, for the more an investment must earn, before tax, to deliver an acceptable rate of return after tax, the fewer such investments will take place.

“Race to the bottom” rhetoric to the contrary, taxes remain in every country far in excess of what is required to fund “essential public goods.” Indeed, while corporate tax rates have fallen, corporate tax revenues have not. For example, over the past 30-odd years Canada has slashed its federal rate from 38 per cent to 15 per cent. Yet revenues from the tax, as a share of GDP, have remained unchanged, at around 2 per cent.

And of course, corporations don’t actually pay the tax. People do. One way or another, the corporate tax is always passed on: either to consumers, in higher prices, or shareholders, in lower returns, or especially to the company’s employees, in lower wages. Which is one reason many economists propose abolishing the corporate income tax altogether, in favour of a cash-flow or windfall profits tax. Would a country that wished to implement such a reform run afoul of Ms. Yellen’s agreement?

Perhaps the U.S. might persuade countries with tax rates equal to or higher than its own to join its proposed global tax-fixing ring. It’s less likely that countries such as Hungary, with a corporate tax rate of 9 per cent, or Ireland, at 12.5 per cent, would. (Would Canada? The Biden tax increase would restore the corporate tax rate advantage we lost in 2017. Why would we agree to give this up?)

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True, the OECD has discussed its own minimum tax plan, but at a rate of 12 per cent, not the 21 per cent the U.S. proposes. Even there, agreement may prove elusive, and fleeting. Cartel discipline is notoriously hard to maintain.

It’s not even clear why the U.S. is pursuing this. The standard rationale is to prevent U.S.-based multinationals from engaging in tax arbitrage – shifting profits from higher-tax jurisdictions to lower-tax, by means of various accounting tricks. But the U.S. already has a remedy at hand. The 2017 reforms, for the first time, taxed U.S. corporations on income booked to their foreign subsidiaries, at half the statutory rate. The Biden plan would increase this rate to 21 per cent, a discount of just seven points. Presto: the incentive for tax arbitrage is reduced.

Of course, it could have closed the gap from the other end, by further cuts to the standard rate. But that would interfere with the Biden administration’s Ozymandian spending ambitions. How much easier to bully other countries into, in effect, footing part of the bill.

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