Some ideas are so absurd, the adage goes, that only an intellectual could believe them. The global minimum corporate tax outlined by U.S. Treasury Secretary Janet Yellen is one of them. The proposal will not only embarrass U.S. President Joe Biden because of its likely failure, but could also empower countries seeking to undermine the liberal international order, especially China and Russia.
The underlying concept’s resonance with liberal politicians like U.S. President Joe Biden is as unsurprising as its appeal to a liberal intellectual like Yellen. The world’s governments would start approaching multinational corporations like they approach the labor market—only instead of a global minimum wage, they would collectively demand a global minimum tax. The intended effect: more money for governments and less money for corporations. To its proponents, an equal minimum tax has an appealing moral clarity. And it’s an elegant concept in economic theory.
In practice, however, the policy’s odds of success are slim.
For starters, multilateralism will stumble in tax policy for the same reason it can be so successful in trade policy: the incentives for joining versus staying out. In a trade deal, the economic benefits of membership grow as more countries join and the size of the market made accessible by the trade deal increases. With a global minimum tax, however, the economic benefit to any one country that stays out grows as more countries join. As a non-member grows, you can outcompete the global market via lower taxes.
Take Ireland, which has become a favorite location for global multinationals in part because of its very favorable tax code. If a small country like Ireland stayed out of a free-trade regime like the European Union, it’d be shooting itself in the foot. On taxes, however, staying out of any global tax deal would ensure it can still have a tax code that allows it to remain more attractive to global corporations than most countries. That means Ireland will likely fight tooth and nail to stay out of any global minimum tax regime.
Second, the domestic political maneuvering that any successful global minimum corporate tax would require in many countries makes the politics of trade look enviable. Many member states of the Organisation for Economic Cooperation and Development (OECD) have federal systems, where regional and local governments impose taxes on corporations to no small extent. This fiscal federalism typically reflects political federalism, which, in turn, reflects a country’s foundational political compromises. A uniform minimum tax would, in various federally organized countries, reawaken long-settled constitutional questions about the balance of power between central and subnational governments.
In a federal country, such as the United States, Canada, Germany, Japan, or Switzerland, any functioning global minimum corporate tax system would require an unprecedented degree of tax homogenization and coordination among national, regional, and local jurisdictions. And these jurisdictions would be a constant source of potential loopholes and other troubles in any minimum tax system.
Suppose there is a 25 percent global minimum tax and Canada’s provincial taxes are 10 percent. If Canada’s national government implements the 25 percent rate, companies end up paying 35 percent total, putting Canada at a permanent disadvantage relative to countries with no subnational taxes. On the other hand, suppose Canada’s national government allows companies to deduct regional taxes from their national corporate tax bill. That would turn the provincial corporate tax into a device for transferring tax revenue away from the national government—and into a source of political conflict between national and subnational governments.
The United States is another case where federalism would likely vex any serious attempts to homogenize corporate taxation under a minimum tax regime. U.S. governors and mayors have a habit of offering carrots like tax breaks to lure businesses and jobs to their constituents. They wouldn’t be happy if they had to break that habit. If the federal government tried to prohibit governors and mayors from granting these types of concessions on corporate taxes, they could simply use other concessions. Instead of corporate tax breaks, California’s governor could offer corporations “green” subsidies, for instance. Even if national governments were to commit to refraining from these types of equivalent subsidies—and there is little reason to believe they will, except perhaps on paper—they’d need to somehow tie the hands of regional and local governments. And for national governments to assert power that way, entire constitutions might need to be rewritten.
In fact, the United States may be among the worst positioned of OECD members to lead a global coalition on a minimum corporate tax. If the Biden administration were to sign an international treaty establishing a global minimum tax, that signature would be a partisan lightning rod much like the Iran nuclear deal, with little chance of passing in the U.S. Senate. If, on the other hand, a global minimum tax is merely a handshake agreement between heads of government and implemented in the United States by executive order, the policy is unlikely to last a day longer than a Democratic administration. All foreign governments will know this, making them wary of paying their own political costs at home in exchange for an ephemeral multilateral deal.
In the unlikely event that Yellen’s plan succeeds, one winner would be China. Ever since he was a provincial official, Chinese President Xi Jinping has viewed corporate taxation as part of how China competes with other countries. If rich democracies in the OECD tie their hands on corporate taxes, they’ll be handing China, which is not an OECD member and unlikely to adopt the proposal, an opportunity to use tax rates and breaks to lure even more investment into China. This would directly undermine the Biden administration’s stated goals on diversifying supply chains and containing Chinese power.
In the more likely event that the administration’s global corporate tax plan fails, the embarrassment thus created would hand propaganda points to Russia. If the Biden administration’s global minimum tax fails, it’ll fail after Western democracies have spent at least several months arguing it’s a solution for reducing global inequality. Russia, perhaps by weaponizing information on tax evasion by wealthy Westerners that’s collected by its security services, will be all too happy to remind the world how U.S.-led multilateralism floundered at the attempt to stem that inequality.
Yellen claims the global minimum corporate tax proposal entails “true win-wins” for the United States. In economic theory, she’s not wrong. In the real world, however, the policy is set to be a loss for Washington and its OECD allies alike—and a win for countries like China and Russia.
