Beware the cartel of nations ravenous for a global corporate tax
WASHINGTON >> Adam Smith’s 1776 warning needs updating. He said: “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.” If you have an unromantic understanding of government, you know it is composed not of disinterested altruists but of people as interested in maximizing their power as private-sector actors are interested in maximizing their profits. So, be wary when governments form cartels for enlarging their capture of society’s resources.
The United States and 131 other nations and jurisdictions recently agreed to impose a global tax on a few (mostly American) large corporations. The agreement would impose a 15 percent minimum tax (the Biden administration wanted 21 percent and still plans to impose the higher rate on U.S. companies) on the foreign profits of multinational companies. It would also tax some of the largest corporations’ profits where the corporations’ customers are rather than where their output (factories, etc.) is.
Part of this proposal is a reallocation of taxing rights, benefiting some nations, disadvantaging others. This should interest the U.S. House of Representatives, in which, the Constitution says, “all bills for raising revenue shall originate.”
A large majority of nations have an interest in coercing into conformity the few nations that have prospered by using low corporate tax rates to lure businesses. The Biden administration urgently wants to impede corporate mobility because it proposes to pay for a portion of its spending binge by increasing corporate taxation. (While obfuscating the fact that corporations do not pay taxes, they collect them: Corporate taxation is paid by the corporations’ employees, shareholders and customers.) The new global tax regime would be a disincentive for U.S. businesses to escape the Biden administration’s proposed increase of the corporate tax rate from 21 percent to 28 percent.
Treasury Secretary Janet Yellen, who knows how to provide the media with a helpful vocabulary, characterizes corporate mobility a “race to the bottom.” Actually, it is a race to rationality for Americans, who benefit domestically from “entrepreneurial federalism”: States, understanding that capital goes where it is welcome and stays where it is well-treated, compete (with right-to-work laws and other inducements) to produce inviting economic environments.
The Biden administration is engaged in a familiar government two-step: Government produces conditions injurious for a segment of society; then it impedes the segment from escaping the conditions. For example, governments cede control of public schools to politically powerful teachers unions that advocate ideological agendas and work rules that benefit dues-paying teachers rather than non-dues-paying children. Then, to hinder parents’ escapes from the domain of union power, governments limit the number of charter schools, which are nonunion public schools.
If implemented, the new tax system would redistribute to various nations a small fraction of global gross domestic product. A consortium of European think tanks estimates that 78 current companies (about two-thirds of them American) would be affected. Implementation is, however, uncertain.
Three low-tax European Union members — Ireland, Estonia and Hungary — are, so far, opposed. They are two more than are needed to stop the 27-nation E.U. from adopting the minimum tax. China’s and India’s hesitations about the new regime can perhaps be eliminated by granting carve-outs to protect preferred industries, a process that, once begun, will make the regime porous.
To accept the new global tax system, Congress, which intermittently involves itself in the executive branch’s governance of this nation, would have to change not only some U.S. laws but also some treaties, which would require two-thirds of the Senate. This assumes, perhaps rashly, that a parliamentary maneuver will not be contrived to further erode the rule of law by evading this constitutional requirement. The Paris climate “agreement,” and the nuclear “joint comprehensive plan of action” with Iran, should have been treaties, but were treated as lesser things because the executive branch did not want to try to muster the broad support that the Constitution mandates for momentous measures. For the United States, a congressional embrace of the Biden administration’s global minimum tax rate by waferthin majorities under a ludicrously elastic “reconciliation” process would be most momentous as a further fraying of the nation’s increasing ragged rule of law.
When Adam Smith warned in “The Wealth of Nations” against private sector cartels contriving to raise prices, he did not imagine a 21st-century cartel of governments conspiring to increase tax extractions. Transferring to governments, which always are ravenous for revenue, resources that otherwise would be available for investment, today’s cartel is an attempt to diminish the wealth of nations.