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Biden and Janet Yellen Are Pushing a Global Minimum Tax Rate. The EU Is Very Pleased. – Ryan McMaken (04/08/2021)

It has long been a dream of central planners and interventionists to set a global, uniform tax rates for all regimes. These globalists know that so long as sovereign states have the ability to freely set their own tax rates, some regimes are tempted to engage in “tax competition” in order to attract capital. When this happens “tax havens” which allows companies and individuals to “shop around” in terms of where to put their productive wealth.

The antidote to this “problem,” we are told, is so-called tax harmonization. Under tax harmonization schemes, all governments are forced to impose a certain minimum tax rate so that high-tax countries need not compete with low-tax countries. Non-compliance comes with sanctions.

Without tax havens, of course, regimes have more freedom to raise taxes to ever higher levels because the gap because the high-tax regimes and low-tax regimes is significantly lessened.

So, it should surprise no one that President Biden’s Treasury Secretary Janet Yellen is now pushing for a global minimum corporate tax, and for an increase to the US corporate taxes:

U.S. Treasury Secretary Janet Yellen on Monday urged the adoption of a minimum global corporate income tax, an effort to at least partially offset any disadvantages that might arise from the Biden administration’s proposed increase in the U.S. corporate tax rate.

Citing a “30-year race to the bottom” in which countries have slashed corporate tax rates in an effort to attract multinational businesses, Yellen said the Biden administration would work with other advanced economies in the Group of 20 to set a minimum.

Naturally, such a scheme doesn’t work without a means to punish countries that don’t cooperate. According to Reuters,

The U.S. plan envisages a 21% minimum corporate tax rate, coupled with eliminating exemptions on income from countries that do not enact a minimum tax to discourage the shifting of jobs and profits overseas.

In other words, “Biden’s corporate tax measure would also penalize other countries without a minimum corporate tax by more heavily taxing their subsidiaries in the U.S.”

A Long War on Tax Competition

The US’s new attack on tax havens and tax competition comes after years of attempts by the EU and the Organization for Economic Cooperation and Development (OECD) to impose enforceable minimum tax rates. The OECD is currently in the process of negotiating what Daniel Mitchell calls a “global high tax cartel.”

Moreover, the European Commission has been complaining for many years about low-tax member states within the bloc.

In early 2019, for example, European Commission president Jean-Claude Juncker pushed the idea of ending the ability of EU members to veto changes in tax policy so as to make tax rates across EU countries more equal. Ireland and Hungary, which have adopted low tax rates to attract businesses, have long opposed such effortsMalta has vehemently objected as well.

In the EU, France and Germany—the largest and most powerful states in the bloc—have pushed for an EU-wide corporate tax policy for years. Germany and France have already announced plans to bilaterally pursue a common corporate tax policy, but this is just the first step. The next step is to impose minimum tax rates on the rest of Europe as well.

Europe isn’t the only place where regimes have hoped to attract capital with low tax rates. Small island nations in the Caribbean also function as tax havens and have earned the ire of the European Union’s leadership.

In many ways, the effort to achieve tax harmonization is also a war on small countries, waged by big, powerful countries.

After all, small countries have limited tools in attracting capital. All else being equal, small countries that use small-time local currencies are at a disadvantage  in a world of competing fiat currencies. Small countries also potentially have less access to ready labor and other inputs necessary for production. Finally, small countries are at a disadvantage when they are physically located far from other centers of capital. This is the case for many Caribbean and Eastern European countries.

East vs. West, and Rich vs. Poor

One way small countries can compete is by lowering corporate tax rates. This is partly why Ireland, Malta, and Hungary have all pursued low-tax policies. In fact, in 2019, Hungary slashed its corporate tax rate to 9 percent from 19 percent. Ireland—which has long been in the periphery of Europe and was considerably poorer than the rest of Western Europe as late as the early 1990s— has now become known for its relatively low corporate tax rate, which now stands at 12.5 percent. In contrast, France’s corporate tax rate as of 2020 was 32 percent. Germany’s rate was 29.9 percent. Indeed, it is no coincidence that the old established economies of the EU—France, Germany, Spain, Italy, and the Low Countries—all have higher corporate tax rates compared to the old Iron Curtain countries.

In Poland and Czechia, for example, the corporate tax rate is 19 percent. It’s 16 percent in Romania. Naturally, after the end of the Soviet Union, these countries sought to raise their standards of living and enter the global marketplace. One way to attract capital was to make their economies more attractive to foreign capitalists.

The rich West of Europe has never approved of this strategy.

So, for at least a decade, EU politicians have openly complained that tax competition is “a threat to the European Union.” The regimes in the West don’t like having to deal with smaller, poorer regimes who can offer lower taxes to employers, investors, and producers.

Now, it looks like the US is joining this effort to force smaller poorer countries to raise their tax rates. The Trump administration had thrown a bit of a wrench in the EU’s plans to harmonize taxes when Trump was able to win approval of a corporate tax cut from 35 percent to 21 percent. That presented an indirect threat to the Franco-German plan to turn the industrialized world into one big high-tax bloc. But now with Biden in the White House, the US looks like its “ready to help” by raising US rates to a France-friendly 28 percent, and by also pushing for a new global tax regime. 

The high-tax regimes of the world will be more than happy to join in.