Time to (Finally) Defund the OECD?

Nearly 13 years ago, I narrated this video about the Organization for Economic Cooperation and Development, a Paris-based international bureaucracy that uses American tax dollars to advocate for bigger government and higher taxes.

Everything I said in that video is still true, except now the federal budget is far bigger and the OECD has had about a dozen more years to push for dirigiste policies.

It is particularly disgusting (and hypocritical) that the OECD is a big cheerleader for higher taxes, yet its bureaucrats get tax-free salaries.

Not only does the OECD urge higher taxes in countries all around the world (even poor countries!), it also lobbies to undermine tax competition by advocating for policies such as Joe Biden’s corporate tax cartel.

And it adds insult to injury that American taxpayers are subsidizing this nonsense.

But maybe that will come to an end. Reporting for Bloomberg Tax, Samantha Handler and Chris Cioffi explain that Republicans are threatening to end U.S. subsidies for the Paris-based bureaucracy.

Republicans are plotting ways to push back on the landmark global tax deal agreed to by nearly 140 countries, including by calling to pull US funding for the OECD that’s leading the negotiations. …“There’s concerns about the work product of the OECD,” said Rep. Adrian Smith (R-Neb.), the Ways and Means trade subcommittee chairman. …The US currently funds 19.1% of Part I of the OECD’s budget, according to the letter addressed to House Appropriations State, Foreign Operations, and Related Programs Chairman Mario Diaz-Balart (R-Fla.) and ranking member Rep. Barbara Lee (D-Calif.). …Chairman Jason Smith (R-Mo.) sent a letterlast month to the OECD Secretary-General Mathias Cormann, urging him to reject all proposals that would affect US jobs and tax revenue. Jason Smith called Pillar Two’s undertaxed profits rule “fundamentally flawed.”

Needless to say, Republicans should defund the OECD. Giving American tax dollars to the bureaucrats in Paris is a subsidy for the left.

For all intents and purposes, this is an IQ test for Republicans. Presumably, they are smart enough to understand that they should not send money to the Democratic National Committee or MSNBC. You would think they would also be smart enough not to subsidize a bureaucracy that advocates for the DNC/MSNBC agenda.

Unfortunately, Republicans have a well-deserved reputation for being the “stupid party.”

• They had total control of Washington from 2002-2006 during the Bush year. Did they defund the OECD? No.
• They had todal control of Washington from 2017-2018 during the Trump years. Did they defund the OECD? No.

To make matters worse, Republicans are sometimes so stupid that they actively help the OECD push for bad policy. Here’s another blurb from the article.

Momentum started building on the global tax talks under the Trump administration, with the US participating actively in the negotiations.

To be fair, the Trump Administration sort of proposed to defund the OECD back in 2017, but there was zero follow-through (hardly a surprise since Trump wound up being a big spender).

Instead, his dilettante Treasury Secretary actively supported the OECD.

The bottom line is that I’m happy that some Republicans are threatening to defund the OECD but I’m not overflowing with confidence that they will have the intelligence and diligence to make it happen. Even if they wind up back in power after the 2024 election.

P.S. There is at least one Republican who is very principled on the issue of the OECD.

P.P.S. The OECD sometimes resorts to grotesque dishonesty while pushing for bigger government.

P.P.P.S. I’ve been accused of “trading with the enemy” because I argue against the OECD. Heck, the bureaucrats even threatened to throw me in a Mexican jail.

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The IMF’s Dirigiste Tax Agenda, Part I

Thanks in large part to the pro-growth agendas of Margaret Thatcher and Ronald Reagan, but also giving credit to policymakers in nations like Ireland and Switzerland, businesses (and their workers, consumers, and shareholders) have benefited from four decades of tax competition.

How much have they benefited?

As shown by this chart, average corporate tax rates have dropped by about half since the early 1980s.

Not everybody is happy that corporate tax rates have declined.

Politicians in high-tax nations have always resented tax competition and they have been working through left-leaning international bureaucracies to push for various forms of tax harmonization.

Unfortunately, they have been partially successful.

Over the past 20 years, the human right of financial privacy has been substantially eroded so that uncompetitive governments can track – and tax – money that migrates to low-tax jurisdictions.

As a result, politicians recently have been raising personal income tax rates.

And they want to also raise corporate income tax rates, which is why many pro-tax politicians (including Joe Biden) are supporting a global tax cartel on business income.

The International Monetary Fund has a new report praising this effort. Authored by Ruud de Mooij, Alexander Klemm, and Christophe Waerzeggers, it celebrates the fact that politicians will be diverting more money from the productive sector of the economy

P1 is estimated to reallocate about 2 percent of total profits of MNEs, mainly from low-tax investment hubs to other countries, raising global Corporate Income Tax (CIT) revenue by $12 billion. …P2 would raise global CIT revenues by 5.7 percent, which is before any behavioral responses by firms (Figure 1b). According to staff simulations, 18.5 percent of global profit of MNEs is taxed below 15 percent ($1.47 trillion in 2019). On average, the current tax rate on these profits is 5 percent, so that profits exceeding the substance-based income exclusion would be subjected to a average top-up tax of 10 percent. …An additional positive revenue impact from P2 could come from reduced competition over corporate tax rates, which could boost global CIT revenues by an extra 8.1 percent. …a 1 percentage point increase in the world average CIT rate will, on average, induce a country to raise its own rate by 0.6 percentage points. By putting a floor of 15 percent, the simulations above suggest that 18.5 percent of MNE profit will indeed face a higher CIT burden, implying that countries will feel less pressure to keep their own tax rates low. Using simulations of the tax competition model, we find that the average CIT rate would rise from 22.2 to 24.3 percent due to the global minimum tax. The associated boost in global CIT revenues would be 8.1 percent, exceeding the direct effect on revenue.

By the way P1 is Pillar 1, which is the proposal to give powerful nations a bigger claim on the taxable income of big companies. By contrast, P2 is Pillar 2, which is the proposal for a mandatory minimum tax of at least 15 percent on corporate income.

In other words, a tax cartel.

As you can see from this next chart, most of the additional revenue is the result of the scheme for a 15 percent tax cartel.

I’ll close with two observations about this depressing data.

First, the IMF’s own research shows that reductions in corporate tax rates have not resulted in lower revenues. But I guess they now want to ignore the Laffer Curve since politicians want to grab more money.

Second, we should all be outraged that IMF bureaucrats (including the authors of the paper cited above) receive tax-free salaries while pushing for higher taxes on the rest of us.

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A Case Study on Corporate Tax and Competitiveness

Last year’s three-part series on corporate tax rates (here, here, and here) primarily focused on the case for low rates in the United States.

Today, we’re going to look at why the United Kingdom should have a low corporate tax rate.

Though the arguments don’t change simply because we cross the Atlantic Ocean.

A low corporate tax rate is a good idea because it means more investment, higher productivity, and better wages.

That’s true in the U.S., it’s true in the U.K., and its true in every other nation.

If you want evidence, Phil Radford’s article for CapX explains why the U.K.’s pharmaceutical industry has contracted while Ireland’s has expanded.

AstraZeneca’s plan to build a $350m pharmaceuticals factory in Ireland rather than the UK was 100% predictable. …the long-term failure of UK pharma highlights how UK policy discussion is light years behind our competitors when it comes to understanding what drives prosperity. …The trend kicked off back in 2011, when US-based Pfizer shifted its Viagra-making plant from Sandwich in Kent to Ringaskiddy, near Cork. This event marked the start of a five-year plunge in UK pharma manufacturing and exports… According to ONS, output in UK pharma manufacturing declined by roughly one-third from 2010 to 2015. Gross value added actually halved. Where did the manufacturing go? Ireland… What’s caused this malady? In a word: taxation. …corporate taxation levels appear to exert a dominating effect on where pharmaceuticals companies locate their factories. …Ireland’s corporate tax rate fell from 40% in 1996 to 12.5%n 2003, and it has stayed at that level for the past 19 years. Meanwhile, the UK’s corporate taxation rate was 30% 20 years ago, and from 2008 it began a gentle drift downwards to 19% where it will remain until April this year, when it will increase to 25%. This means, from AstraZeneca’s point of view, the investment equation is a no-brainer. Even if Ireland is forced to raise its rate to 15%, the country will shortly regain its general comparative level of between one-half and two-thirds the UK rate.

The data in Radford’s article is a damning indictment of the supposedly conservative government in the United Kingdom.

A few years ago, the corporate tax rate was 19 percent and expected to drop to 17 percent. Now, thanks to an unwillingness to control spending, the rate is jumping to 25 percent.

And, as noted in the article, the U.K. lost a $350 million factory. As well as all the jobs and taxable income that it would have generated.

Politicians are winning and people are losing.

P.S. Biden wants to make the same mistake.

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Corporate Tax Rates and Taxable Income

In the case of business taxation, the most visually powerful evidence for the Laffer Curve is what happened to corporate tax revenue in Ireland after the corporate tax rate was slashed from 50 percent to 12.5 percent.

Tax revenue increased dramatically. Not just in nominal terms. Not just in inflation-adjusted terms.

Corporate receipts actually climbed as a share of GDP.

And this was during the decades when economic output was rapidly expanding.

In other words, the Irish government got a much bigger slice of a much bigger pie after tax rates were dramatically lowered.

Now let’s look at some evidence from a new study. Three professors from the University of Utah (Jeffrey Coles, Elena Patel, and Nather Seegert), and a Treasury Department economist (Matthew Smith) estimated what happens to taxable income for U.S. companies when there is a change in the corporate tax rate.

In response to a 10% increase in the expected marginal tax rate, private U.S. firms decrease taxable income by 9.1%, which indicates a discernibly more elastic response than prevailing estimates. This response reflects a decrease in taxable income of 3.0% arising from real economic responses to a firm’s scale of operations and 6.1% arising from accounting transactions via (for example) revenue and expense timing. Responsiveness to the corporate tax rate is more elastic if a firm uses cash (9.9%) rather than accrual accounting (7.4%), if the firm is small (9.9%) rather than large (8.6%), and if the firm discounts future cash flows at a lower rate.

The paper is filled with equation, graphs, and jargon, but the above excerpt tells us everything we need to know.

When tax rates go up, taxable income goes down (both because there is less economic activity and because companies have more incentive to manipulate the tax code).

Thus confirming what I wrote back in 2016 about taxable income being the key variable.

By the way, this does not mean that lower tax rates lead to more revenue. Or that higher tax rate produce less revenue.

Such big swings only happen in rare circumstances.

But it does mean that politicians will not grab as much money as they hope when they increase tax rates. And that they won’t lose as much revenue as they fear when they lower tax rates (and we saw that most recently with the 2017 tax reform).

I’ll close by noting that this is additional evidence for why we should be thankful that Biden’s proposal for higher corporate tax rates was not enacted.

P.S. The chart at the beginning of this column may be the most visually powerful evidence for the corporate Laffer Curve. The most empirically powerful evidence, however, comes from very unlikely sources – the pro-tax IMF and the pro-tax OECD.

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Taxing Stock Buybacks: Bad for Workers and Investors

Whenever I discuss the varying types of double taxation on saving and investment (capital gains tax, dividend tax, corporate income tax, death tax, wealth tax, etc), I always emphasize that such levies discourage capital (machinery, tools, technology, etc) which leads to lower levels of productivity.

And lower levels of productivity mean less compensation for workers.

Some of my left-leaning friends dismiss this as “trickle-down economics,” but the relationship between capital and wages is a core component of every economic theory.

Even socialists and Marxists agree that investment is a key to rising wages (though they foolishly think government should be charge of making investments).

I’m providing this background because today’s column explains that politicians made a mistake when they included a tax on “stock buybacks” in the misnamed Inflation Reduction Act.

I’ve written once on this topic, mostly to explain that buybacks should be applauded. They are a way for companies to distribute profits to owners (shareholders) and have the effect of freeing up money for better investment opportunities.

Let’s look at some more recent analysis.

In a column for today’s Wall Street Journal, two Harvard Professors, Jesse Fried and Charles Wang, debunk the anti-buyback hysteria.

A 1% tax on stock buybacks is poised to become law as part of the Inflation Reduction Act just passed by the Senate. This is a victory for critics… But those critics are dead wrong. If anything, American corporations should be repurchasing more stock. Taxing buybacks will increase corporate bloat, lead to higher CEO pay, harm employees and reduce innovation in the economy. …A tax on buybacks will harm shareholders. It creates an incentive for managers to hoard cash, leading to even more corporate bloat and underused stockholder capital. Because CEO pay is tied closely to a firm’s size, this bloating will drive up executive compensation, further hurting investors. …Taxing buybacks will harm employees as well. …Our research shows that 85% of this value flows to employees below the top executive level. Increasing the tax burden will tend to lower equity pay, to the detriment of workers. …A tax that inhibits buybacks will also reduce the capital available to smaller private firms. The cash from shareholder payouts by public companies often flows to private ones, such as those backed by venture capital or private equity. These private firms account for half of nonresidential fixed investment, employ almost 70% of U.S. workers, are responsible for nearly half of business profit, and have been important generators of innovation and job growth. Bottling up cash in public companies will reduce the capital flowing to private ventures—and thus their ability to invest, innovate and hire more workers.

Professor Tyler Cowen of George Mason University makes similar points, in a very succinct manner.

This is flat out a new tax on capital, akin to a tax on dividends. …Are you worried about corporations being too big and monopolistic?  This makes it harder for them to shrink!  Think of it also as a tax on the reallocation of capital to new and growing endeavors.

Catherine Rampell of the Washington Post is far from a libertarian, but even she warned that the hostility to stock buybacks makes no sense.

You’ve probably heard some ranting recently about “stock buybacks,” the term for when a public company repurchases shares of its own stock on the open market. …Why do Democrats hate buybacks so much? …they proposed legislation to ban buybacks. They excoriated companies for returning cash to shareholders… Share buybacks themselves aren’t necessarily bad — particularly when the alternative is wasting investor money… Yelling at companies to stop their buybacks won’t cause them to increase investment… In fact, some policy measures Democrats are considering, ostensibly to discourage firms from returning so much cash to shareholders, would do the opposite.

The only good news to share is that the tax being enacted by Democrats is just 1 percent, so the damage will be somewhat limited (the main economic damage will be because of another provision in the legislation, the tax on “book income“).

Though I suppose we should be aware that a small tax can grow into a big tax (the original 1913 income tax had a top rate of just 7 percent and we all know that the internal revenue code has since morphed into an anti-growth monstrosity).

The bottom line is that the crowd in Washington has made a bad tax system even worse.

P.S. Since we have been discussing how taxes on capital are bad for workers, this is an opportunity to share an old cartoon from the British Liberal Party (meaning “classical liberal,” of course). The obvious message is that labor and capital are complementary factors of production.

And the obvious lesson is that you can’t punish capital without simultaneously punishing labor. Sadly, I’m not holding my breath waiting for Washington to enact sensible tax policy.

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Evidence for Lower Corporate Tax Rates, Part III

To begin Part III of this series (here’s Part I and Part II), let’s dig into the archives for this video I narrated back in 2007.

At the risk of patting myself on the back, all of the points hold up very well. Indeed, the past 15 years have produced more evidence that my main arguments were correct.

• Lower corporate rates reduce double taxation
• Lower corporate rates reduce taxes on people
• Lower corporate rates boost worker income
• Lower corporate rates boost competitiveness
• Lower corporate rates generate revenue feedback

The good news is that all these arguments helped produce a tax bill that dropped America’s federal corporate tax rate by 14 percentage points, from 35 percent to 21 percent.

The bad news is that Biden and most Democrats in Congress want to raise the corporate rate.

In a column for CapX, Professor Tyler Goodspeed explains why higher corporate tax rates are a bad idea. He’s writing about what’s happening in the United Kingdom, but his arguments equally apply in the United States.

…the more you tax something, the less of it you get. …plans to raise Corporation Tax and end relief on new plant and machinery will result in less business investment – and steep costs for households. …Treasury’s current plans to raise the corporate income tax rate to 25% and end a temporary 130% ‘super-deduction’ for new investment in qualifying plant and machinery would lower UK investment by nearly 8%, and reduce the size of the UK economy by more than 2%, compared to making the current rules permanent. …because the economic costs of corporate taxation are ultimately borne both by shareholders and workers, raising the rate to 25% would permanently lower average household wages by £2,500. …the macroeconomic effects of raising the Corporation Tax rate to 25% would alone offset 40% of the static revenue gain over a 10-year period, and as much as 90% over the long run.

To bolster his argument for good policy on that side of the Atlantic Ocean, he then explains that America’s lower corporate tax rate has been a big success.

Critics of corporate tax reform should look to the recent experience of the United States… At the time, I predicted that these changes would raise business investment in new plant and equipment by 9%, and raise average household earnings by $4,000 in real, inflation-adjusted terms. …By the end of 2019, investment had risen to 9.4% above its pre-2017 level. Investment by corporate businesses specifically was up even more, rising to 14.2% above its pre-2017 trend in real, inflation-adjusted terms. Meanwhile, in 2018 and 2019 real median household income in the United States rose by $5,000 – a bigger increase in just two years than in the entire 20 preceding years combined. …What about corporate income tax revenues? …corporate tax revenue as a share of the US economy was substantially higher than projected, at 1.7% versus 1.4%.

If you want more evidence about what happened to corporate tax revenue in America after the Trump tax reform, click here.

Another victory for the Laffer Curve.

Not that we should be surprised. Even pro-tax bureaucracies such as the International Monetary Fund and Organization for Economic Cooperation and Development have found that lower corporate rates produce substantial revenue feedback.

So let’s hope neither the United States nor the United Kingdom make the mistake of undoing progress.

P.S. The specter of a higher corporate tax in the United Kingdom is especially bizarre. Voters chose Brexit in part to give the nation a chance to break free of the European Union’s dirigiste approach. But instead of adopting pro-growth policies (the Singapore-on-Thames approach), former Prime Minister Boris Johnson opted to increase the burden of taxes and spending. Hopefully the Conservative Party will return to Thatcherism with a new Prime Minister (and hopefully American Republicans will return to Reaganism!).

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Evidence for Lower Corporate Tax Rates, Part II

Adding to already voluminous research in the area (including studies from Australia, Canada, Germany, and the United Kingdom), I wrote yesterday about a new study showing that lower corporate tax rates produce more economic growth.

Not that these results should be a surprise.

Anyone with a basic understanding of economics realizes that taxes discourage the activity that is being taxed (something politicians understand when they discuss levies on tobacco).

And the higher the tax, the greater the damage.

Today, let’s revisit the 2017 Trump tax cuts, particularly the reduction in the corporate tax rate.

The International Monetary Fund has published new research on the issue, looking specifically at the impact of cross-border investment. Here are some excerpts from the study, which was written by Thornton Matheson, Alexander Klemm, Laura Power, and Thomas Brosy.

The 2017 Tax Cuts and Jobs Act (TCJA) sharply reduced effective corporate income tax rates on equity-financed US investment. This paper examines the reform’s impact on US inbound foreign direct investment (FDI) and investment in property, plant and equipment (PPE) by foreign-owned US companies. …We find that both PPE investment and FDI financed with retained earnings responded positively to the TCJA reform, but FDI financed with new equity or debt did not. …the increase in PPE investment after TCJA was driven by general economic growth. In regressions of FDI financed with retained earnings, however, tax coefficients were robust to inclusion of macroeconomic controls. As the literature predicts, EATRs have a greater impact on cross-border investment than EMTRs.

These results are interesting, but not overwhelming.

So why am I citing this research?

Because of the following chart, which shows two very important and very desirable results of the 2017 tax bill.

• First, we see lower average tax rates and lower marginal tax rates for the three types of business financing on the right.
• Second, we can see from “EMTR debt finance” on the left that the legislation significantly reduced the tax code’s bias for debt.

Here’s the chart, with the blue bars representing pre-2017 tax rates and the orange bars showing today’s tax rates.

The bottom line is that the 2017 law moved tax policy in the right direction. In a big way.

We got lower rates and moved closer to neutrality.

And I say that as someone who has no problem criticizing some of the other policies we got during that era.

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Evidence for Lower Corporate Tax Rates, Part I

Here is the argument why corporate tax rates should be as low as possible.

• High corporate tax rates discourage investment.
• Less investment reduces worker productivity.
• Lower rates of productivity result in lower wages.

In an ideal world, there would be no corporate income tax (or any income tax).

But I’ll gladly accept any movement in the right direction, which is why the reduction in the corporate tax rate was the crown jewel of Trump’s 2017 tax plan.

The bad news is that Biden wants to undo much of that progress.

Today, let’s look at some new academic evidence on the issue. A new study from the National Bureau of Economic Research, authored by Professors James Cloyne, Joseba Martinez, Haroon Mumtaz, and Paolo Surico, finds that lower corporate rates are especially beneficial for long-run prosperity.

We use…post-WWII U.S. data on output, taxes, productivity and R&D spending to estimate the dynamic effects of income tax changes…and focus on personal and corporate income tax changes separately. …In Figure 1, we present our first set of main results. The figure contains two columns. On the left, we show the IRFs to a reduction in the average corporate tax rate. On the right, we show the results for a reduction in the average personal tax rate. …The first row in Figure 1 reveals that, following a shock to corporate and personal income taxes, the average tax rates decline temporarily. …The second row in Figure 1 shows the impulse response functions for the percentage response of real GDP. … Looking at the first column it is clear that, despite the transitory nature of the corporate tax reduction, there are very persistent effects on real GDP, whose short-run increase of 0.5% persists throughout the ten year period shown in the figure. In other words, the corporate income tax cut has disappeared after 5 years, but the effect on the level of economic activity is still sizable and significant after 8 years. …A similar picture emerges for productivity, as shown in the third row of Figure 1. Both tax rate cuts boost productivity on impact, with the size of the initial response to a personal income tax cut being much larger than for a cut to corporate taxes. On the other hand, the effects of corporate tax cuts grow over time and remain significant even after 10 years.

Here’s the aforementioned Figure 1 from their research.

I’ll conclude by noting that permanent tax cuts are much better than temporary tax cuts.

But if taxes are being cut, regardless of duration, the goal should be to get the most bang for the buck. And there’s plenty of evidence (from the United States, Australia, Canada, Germany, and the United Kingdom) that lowering corporate tax rates is a smart place to start.

P.S. It’s unfortunate that Biden wants a higher corporate tax burden in the United States. It’s even more disturbing that he wants a global tax cartel so the entire world has to follow in his footsteps. But he apparently does not understand the topic.

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Deconstructing Biden’s Corporate Tax Cartel, Part III

As part of my continuing efforts to derail Biden’s global minimum tax on businesses (here’s Part I and Part II), I explain the downsides of the president’s plan in this clip from a recent interview.

If you don’t want to spend three minutes to watch the above video, my views are summarized by this excerpt from an interview with the BBC.

Simply stated, politicians want to grab more money from businesses.

But let’s not forget that taxes on companies are actually paid by workers, consumers, and shareholders.

We do have some good news. Hungary is stopping, at least temporarily, the European Union from embracing its version of a minimum tax.

In a column for the Wall Street Journal, a member of that nation’s parliament explains his government’s position.

Adopting the European Commission’s minimum-tax directive now would be a profound mistake. …The EU directive, proposed by the European Commission in December 2021, aims to introduce a 15% minimum tax rate, effective Jan. 1, 2023…the current proposal would increase the tax burden on European manufacturers, which drive economic growth. The directive would need to be unanimously agreed by 27 EU member states to take effect. Hungary can’t support a proposal that would hurt the weakened European economy… Adopting the directive would hit Central European economies the hardest by damaging their favorable tax systems, a key competitive advantage over their Western European counterparts. …Hungary’s ability to set its own fiscal policies in this crisis is indispensable. To protect our competitiveness and sovereignty, the Hungarian National Assembly passed a resolution prohibiting the government from agreeing to implement a global minimum tax.

Let’s be thankful that Hungary said no.

But I’m still very worried, for two reasons.

• First, the column focuses on why it would be a very bad idea to impose a global tax cartel during the current period of economic turmoil. That’s true, but it implies that it might be acceptable to impose a global minimum tax at some other point. That’s definitely not the case.
• Second, it’s bad news that other nations – such as Ireland, Estonia, and Luxembourg – didn’t side with Hungary (Ireland’s capitulation is particularly disappointing).

Since we’re discussing the merits (or lack thereof) of a global minimum tax, let’s look at what others have written about the idea.

Aharon Friedman and Joshua Rauh opined against the concept of a global minimum corporate tax in an article for Fox News.

…the administration is conspiring at the OECD to stifle tax competition across the globe by effectively requiring all countries to impose similarly high tax rates. …teaming up with the OECD to be the world’s tax policeman would be disastrous for many reasons. …a global minimum tax would have to feature very detailed rules over every aspect of taxation, from cost recovery, losses, and interest deductibility, to tax incentives such as R&D and what kinds of businesses must be subject to the tax in the first place. The scheme would shift enormous power to the OECD Secretariat, which would start to look like the world’s IRS Commissioner. This would also be a backdoor through which to further strip tax lawmaking from Congress and place it in the hands of Treasury and its foreign counterparts. …The Biden administration is trying force countries across the world to adopt its own preference for high taxes on corporate income regardless of the effect on employment and wages.

The Wall Street Journal editorialized against this scheme last year.

Ignore the back-slapping about revenues and “fairness.” This deal is bad news for economies recovering from the pandemic, and especially the U.S. …Officials and progressive activists say they’re halting a global “race to the bottom” on corporate taxes. We’re glad they finally concede that tax rates matter to decisions about investment and job creation, since the left has denied this for decades. But the real action has been on tax policy competition, which has been instrumental to economic growth, innovation and job creation since the 1980s. The OECD plan will throttle that competition. That’s because, while the G-7 agreement focuses on the headline rate for the new minimum tax, the OECD plan comes with reams of harmonized fine print… Suppressing tax competition is the main reason the Biden Administration broke with Washington’s long, bipartisan tradition of opposing a global minimum tax. …American workers, consumers and shareholders will pay the price.

Writing for CapX, Kai Weiss warns that a global minimum tax is a cartel to benefit governments with uncompetitive tax systems.

…there’s a real danger that these proposals will damage the prosperity of competitiveness of the world’s major economies, while trampling on nation states’ freedom and sovereignty. …The likes of France and Germany have long taken umbrage that smaller member states like Ireland and Luxembourg have used low corporate tax rates… Rather than reconsider their own counterproductive policies, the EU’s two biggest economies have simply decided to try forcing everyone else to play by their rules. …It’s hard to avoid the conclusion that this is another bout of protectionism from countries such as Germany, France, and Italy which have long pursued counter-productive, draconian tax policies. The big difference now is that they have a willing ally in the shape of Joe Biden. …there’s a word for this kind of behaviour. If businesses were following such a strategy instead of governments “we would call this a cartel”.

Last year, Thomas Duesterberg wrote critically about the implications for national sovereignty in a column for the Wall Street Journal.

Treasury Secretary Janet Yellen has a grand idea: a global tax regime. …Together with the Biden administration’s plan to raise the U.S. corporate tax rate to 28% and eliminate preferences, it would return the U.S. to its pre-2017 status as a high-tax jurisdiction, discouraging domestic capital investment and production. More insidious, it would cede authority over taxation, one of the pillars of democratic governance… This approach would transfer significant national sovereignty over corporate taxation, key to overall economic policy, to some yet-to-be-defined international regime under the guidance of the OECD… The Biden team should understand the road it is heading down. …Ceding corporate-taxation authority to an undefined international authority that will inevitably be controlled by an unelected technocratic elite would erode Madisonian principles even further. It would move America closer to the EU model of governance.

Needless to say, the EU model of governance (centralization, harmonization, and bureaucratization) is not a good idea.

I’m not optimistic, but my fingers are crossed that this awful idea of a global minimum tax will fall apart.

If the politicians prevail, the rest of us will lose. We’ll have a system that produces ever-higher tax burdens.

P.S. If you want to understand the case for tax competition, click here, here, and here.

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Say No to Biden’s Global Tax Cartel

A few months ago, I reiterated my opposition to Biden’s proposed corporate tax cartel as part of a longer discussion with Australia’s Gene Tunny.

The main takeaway is that the proposed “minimum global tax” is an agreement by politicians for the benefit of politicians.

As I stated in the discussion. companies do not bear the burden of corporate taxes. Those costs are borne by workers, consumers, and shareholders.

Sadly, those costs will increase if the agreement is finalized. Politicians openly admit they are pushing this cartel to undermine jurisdictional tax competition.

At the risk of stating the obvious, their plan is to give themselves more leeway to increase tax rates.

I’m sharing the above interview and rehashing some of these basic arguments because Barack Obama’s former top economist, Jason Furman, has a column in today’s Wall Street Journal.

Here’s some of what he wrote in favor of the scheme.

Policy makers have the best chance in generations to reform and improve this system while bringing the rest of the world along. Treasury Secretary Janet Yellen has already helped craft an international agreement signed by more than 130 countries. Congress now needs to do its part and lock it in. …The arguments for…fixing Mr. Trump’s reforms were already strong, but the global agreement secured by Ms. Yellen makes them much stronger. In particular, the global agreement removes the main objection to more aggressively taxing overseas income because other countries have all agreed to adopt similar systems. The concerns that U.S. companies would be less competitive or would try to avoid U.S. taxes by incorporating overseas are considerably smaller than they would otherwise be. …The global minimum tax agreement signals the dawn of a new era of international economic cooperation. It will be good for the countries involved and…relatively minimal in only establishing a 15% rate floor.

Notice that Mr. Furman openly acknowledges that the goal is to create a cartel so that politicians will feel less constrained by the liberalizing force of tax competition.

For what it’s worth, I think Professor Bruce Gilley had better analysis in his column, which appeared in the WSJ earlier this year..

World leaders announced a new global corporate minimum tax to great fanfare last year. …The contorted language of the guidance, as well as political foot-dragging in several countries, makes clear that the ballyhooed global tax plan would be a great and expensive flop. Better to let this hydra-headed monster die. The agreement was always a tax grab. …Europe wanted to raise revenue by taxing U.S. companies. The Biden administration has cheered the agreement along with familiar claims that big companies should “pay their fair share.” …Digital multinationals like Amazon, Google, Airbnb and Meta are the target. …the agreement…seeks to establish a 15% minimum global tax rate for international companies… The only plausible way the tax leads to more revenue for the U.S. is if it is used as a cover to raise corporate taxes here, which was perhaps why the Biden administration joined. …According to an International Monetary Fund study, 45% to 75% of the burden of corporate taxes is recouped through lower employee wages.

The bottom line is that the proposal for a global minimum tax is being sold as a way to go after big business and rich shareholders, but ordinary people will be the biggest victims.

We will pay more for products because as the higher taxes filter through the economy and we will have less disposable income because of a diminished job market.

P.S. I have written several times about the utterly fraudulent argument that supposedly profitable companies do not pay corporate taxes.

So this is a good opportunity to share this part of Professor Gilley’s column, which notes that companies are (currently) required to keep two different sets of books (which demagogues then deliberately mix up to advance their false claims).

Public companies already have to keep two sets of books, one for the Securities and Exchange Commission and one for the Internal Revenue Service. The first tells shareholders how well the business is doing; the second tells the government how much is owed and to whom. The new global tax would require multinationals to keep a third set of books to avoid being the target of tax raids by, say, France. The agreement would create many new jobs for accountants and lawyers.

Needless to say, requiring companies to keep a third set of books is a remarkably bad idea.

P.P.S. Here’s a primer on corporate taxation.

P.P.P.S. The bureaucrats at the OECD are big advocates of a global minimum tax. I wonder whether they are so pro-tax because they get tax-free salaries and thus are protected from the awful policies they pursue?

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Corporate Taxes and the Laffer Curve

During the debate about the Trump tax plan, proponents made three main arguments in favor of reducing the federal corporate tax rate from 35 percent to 21 percent.

1. A lower rate would be good for workers, consumers, and shareholders.
2. A lower rate would boost American competitiveness.
3. A lower rate would produce some revenue feedback for the IRS.

The last item involves the “Laffer Curve,” which is a graphical representation of the non-linear relationship between tax rates and tax revenue.

Put in simple terms, entrepreneurs, investors, and business owners have more incentive to earn money when tax rates are modest.

High tax rates, by contrast, discourage productive behavior while also giving people a bigger incentive to find loopholes and other ways of avoiding tax.

This does not mean that lower tax rates produce more revenue, though that sometimes happens.

The main takeaway is the most modest observation that lower tax rates will lead to more taxable income, which means some revenue feedback.

In other words, tax cuts don’t lose as much revenue as predicted by simplistic models (and tax increases don’t generate as much revenue as predicted).

I’ve shared many, many real–world examples of this phenomenon.

And here’s another. Look at how corporate tax revenues in the United States are increasing at a faster rate than projected.

The chart comes from Chris Edwards, and he helpfully explains what has happened.

The revenue surge came as a surprise to government economists. The chart…compares the new Office of Management and Budget March 2022 baseline projections to prior baseline projections from the OMB in May 2021 and the Congressional Budget Office in July 2021. …congressional estimators figured that the government would lose an average $76 billion a year the first four years… Corporate tax revenues were down from 2018 to 2020, but then soared in 2021. Revenues in 2021 of $372 billion (with a 21 percent tax rate) are 25 percent higher than revenues in 2017 of $297 billion (with a 35 percent tax rate). …we’re learning that a lower corporate tax rate is consistent with strong corporate tax revenues. …lower rates…broaden bases automatically through reduced tax avoidance and higher economic activity. Other nations have learned the same lesson. Keeping the corporate tax rate low is a winner for businesses and workers, but it can also be a winner for government budgets.

The Wall Street Journal has a new editorial on this topic. Here are some relevant excerpts.

…the 2017 tax reform that cut corporate tax rates…has been a winner for the economy and federal tax coffers. …Corporate revenue was supposed to fall to historic lows as a share of the economy. Big business supposedly got a windfall and government was robbed. It hasn’t turned out that way. …the big news now is that more corporate tax revenue is flowing into the Treasury at record levels even with the lower rate. …In June 2017, before tax reform passed, CBO predicted corporate tax revenue of $383 billion in fiscal 2021. But in April 2018, after reform passed, CBO lowered its estimate to $327 billion.

So what happened in the real world?

Actual corporate income tax revenue in 2021 was $372 billion—nearly as much at a 21% rate as CBO expected at the 35% rate that was among the highest in the world. Fiscal 2022 is turning out to be even better for the Treasury. Corporate tax revenue for the first six months was up 22% from a year earlier to $127 billion. …What accounts for this windfall for Uncle Sam…? …the Occam’s razor policy answer is that corporate tax reform worked as its sponsors predicted: Lowering the rates while broadening the base by eliminating loopholes created incentives for more efficient investment decisions that paid off for shareholders, workers and the government.

Notice, by the way, that corporate tax revenues have increased faster than projected in both the 2017 forecast and the 2021 forecast.

All of which shows that I may have been insufficiently optimistic when I wrote about this issue last year.

P.S. The goal of tax policy (either in general or when looking at business taxation) is not to maximize revenue for politicians, but rather to maximize prosperity for people. Indeed, if better tax policy leads to a lot of revenue feedback, that’s an argument for further reductions in tax rates.

P.P.S. Both the IMF and OECD have research showing that lower corporate tax rates do not necessarily lead to lower corporate tax revenues.

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The Global Tax Cartel Is a Victory for Politicians over Workers

When President Biden first proposed a global minimum tax on companies, I immediately warned that creating a corporate tax cartel would be very bad news for workers, consumers, and shareholders.

I also warned a BBC audience that proponents would use the agreement as a stepping stone for other statist initiatives to increase the power of politicians.

Simply stated, I’ve been ringing the alarm bells that a tax cartel will lead to ever-higher corporate tax rates. And it will serve as a model for other forms of harmonization.

Well, now that Ireland has capitulated and governments formally adopted the scheme, this is my “I told you so” column.

In a column for the Washington Post, Larry Summers, a former top adviser for Bill Clinton and Barack Obama, celebrates the creation of a global tax cartel.

His column has a laughably inaccurate title, but he starts with some accurate observations about the importance of the agreement.

This agreement is arguably the most significant international economic pact of the 21st century so far. It is built around a profoundly important principle: Countries should cooperate to raise corporate taxation, not compete to reduce it. …It also demonstrates the power of ideas to shape economic policy, as tax scholars have for years been pondering the conundrums of taxing global companies.

I also think the agreement is important, albeit in a very bad way.

And it does show the power of ideas, albeit very bad ideas (though politicians instinctively want more money and power and merely rely on left-leaning academics and policy wonks for after-the-fact rationalizations of statism).

As you might expect, Summers veers from reality to fantasy when discussing the implications of the new tax cartel.

Countries have come together to make sure that the global economy can create widely shared prosperity, rather than lower tax burdens for those at the top. By providing a more durable and robust revenue base, the new minimum tax will help pay for the sorts of public investments that are fundamental to economic success in all countries.

For all intents and purposes, he’s embracing the absurd notion that more growth will materialize if politicians impose higher tax rates and use the money to expand the burden of government.

Proponents of this view conveniently never offer any evidence.

Why? Because there isn’t any.

The scholarly research shows the opposite is true. Free markets and small government are the recipe for growth and prosperity.

I’ll now shift back to a part of the column that is unfortunately accurate.

It is also a template for much more that needs to be done to tackle the adverse side effects of our modern, global capitalism.

What’s accurate about that sentence isn’t the jibe about “adverse side effects” of capitalism (unless, of course, he thinks mass prosperity is a bad thing).

But he’s right about the statists using the global tax cartel as “a template” for further schemes to empower politicians and their cronies.

Summers mentions issues such as public health (I guess he wants to reward the World Health Organization’s corruption and incompetence).

Since I’m a public-finance economist, I’m more worried about cartels that will be created for personal income tax, capital gains tax, dividend tax, wealth tax, etc.

P.S. The corporate tax cartel will lead to higher tax rates, but OECD and IMF data (and U.S. data) show that this doesn’t necessarily mean higher revenue.

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Biden’s Befuddlement on Corporate Taxation

Let’s look today at the wonky issue of “book income” because it’s an opportunity to point out that there are three types of leftists.

1. Honest leftists who understand economics and recognize tradeoffs (I think of them as “Okunites“).
2. Dishonest leftists who understand economics but pretend that tradeoffs don’t exist (the “demagogues“).
3. Leftists who have no idea what they’re saying or thinking (I think of them as, well, Joe Biden).

I’m being snarky about the President because of this recent tweet, which contains a couple of big, glaring mistakes.

What are the mistakes (I’m not calling them lies because I don’t think Biden has the slightest idea that he is wrong, much less why he’s wrong).

• The first mistake is that corporations pay a lot of tax (payroll tax, property tax, etc) even if they are losing money and don’t owe any corporate income tax.
• The second mistakes is that Biden is relying on a report about corporate income taxes that has been debunked because it relied on book income rather than taxable income.
• The third mistake is that the President implies that his plan force all big companies to pay the corporate tax when that’s obviously not true.

Regarding that third mistake, Kyle Pomerleau of the American Enterprise Institute explains why there will still be companies paying zero corporate income tax.

While the Biden administration’s proposals would increase the tax burden on corporations by about $2 trillion over the next decade, they would not change the basic structure of the corporate income tax. The Democrats’ proposal would not end corporations paying zero federal income tax in certain years. Corporations will still be able to carryforward losses, and credits will still be available for corporations to offset their tax liability. The administration has proposed a minimum tax to address these headlines by tying federal tax liability to book income. The minimum tax would require corporations with net income over $2 billion to pay the greater of their ordinary corporate tax liability or 15 percent of their book or financial statement income. Corporations would still be able to offset the book minimum tax with losses and general business credits.

Glenn Kessler of the Washington Post tried to defend Biden’s tweet as part of his misnamed “Fact Checker.”

He had to acknowledge Biden was using a made-up number, but nonetheless concluded that the President’s assertion was “probably in the ballpark.”

This is one of Biden’s favorite statistics. …the president has used it in speeches or interviews 10 times since April. Normally he is careful to refer to “federal income taxes” so the tweet is little off by referring just to “taxes.” …Let’s dig into this statistic. It’s not necessarily wrong but there are some limitations. …The number comes from…the left-leaning Institute on Taxation and Economic Policy (ITEP). …Company tax returns generally are not made public, so ITEP’s numbers are the product of its own research and analysis of public filings. But it is an imperfect measure. …the information in the filings may not reflect what is in the tax returns. …Nevertheless, the notion that 10 to 20 percent of Fortune 500 companies do not pay federal income taxes is consistent with a 2020 report by the nonpartisan Joint Committee of Taxation. …This “55 corporations” number is probably in the ballpark.

For what it’s worth, I don’t care that Kessler gave Biden a pass for writing “taxes” instead of “federal income taxes.”

After all, that’s almost surely what he meant to write (just like Trump almost surely meant “highest corporate tax rate” when complaining about America being the “highest taxed nation”).

But I’m not in a forgiving mood about the rest of Biden’s tweet (or Kessler’s biased analysis) for the simple reason that there is zero recognition that companies occasionally don’t pay tax for the simple reason that they sometimes lose money.

I’ve made this point when writing about boring issues such as depreciation, carry forwards, and net operating losses.

At the risk of stating the obvious, companies shouldn’t pay any corporate income tax in years when they don’t have any corporate income.

P.S. I’m not mocking Biden’s tweet for partisan reasons. I was similarly critical of one of Trump’s tweets that was glaringly wrong on the issue of trade.

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New Competitiveness Rankings: Biden Wants to Copy the Wrong Nations

One of the my favorite publications from the Tax Foundation is the annual International Tax Competitiveness Index (here’s what I wrote in 2020 and 2019).

The 2021 Index, authored by Daniel Bunn and Elke Asen, has now been released, and you can see that Estonia has the most sensible policy.

Other Baltic nations also are highly ranked, as are Switzerland and New Zealand.

It’s probably no surprise to see nations such as France and Italy score so poorly, but Poland is a bit of a surprise.

Since most readers are from the United States, let’s specifically look at America’s rankings.

The U.S. does very will on consumption taxes (ranked #5), largely because we haven’t made the mistake of adding a value-added tax to our system.

By contrast, the U.S. is near the bottom (ranked #32) with regard to cross-border tax rules, though at least America is no longer in last place in that category, as was the case back in 2014.

Here are some additional details for the folks who like to get in the weeds.

The Tax Foundation also released a companion article looking at which nations have enjoyed the biggest improvements or suffered the biggest declines since the Index first began back in 2014.

The United States has been a big winner thanks to the 2017 tax reform, but Israel wins the prize by jumping all the way from #28 to #14.

Colombia has the dubious honor of suffering the biggest decline.

Makes me wonder whether joining the pro-tax OECD (a process that began in 2013) played a role in the country’s shift in the wrong direction.

I’ll close with the sad observation that America’s progress will be reversed if Biden’s class-warfare tax plan is enacted. Earlier this year, the Tax Foundation estimated that the President’s plan would cause the United States to drop eight spots.

Call me crazy, but I don’t understand why folks on the left want the U.S. tax system to be more like Italy’s.

P.S. I would like to see the aggregate tax burden added as one of the variables in the Index, and it also would be interesting if more jurisdictions were included (zero-tax jurisdictions such as Bermuda and the Cayman Islands presumably would beat out Estonia, and it also would be interesting to see where anti-market nations such as China got ranked).

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The Laffer Curve and Trump’s 21 Percent Corporate Tax Rate

Reducing the corporate tax rate from 35 percent to 21 percent was the crown jewel of Trump’s 2017 Tax Cut and Jobs Act (TCJA).

• It was good for workers since a lower rate means more investment, which translates to increased productivity and higher wages.
• And it was good for U.S. competitiveness since the United States corporate tax rate no longer was the highest in the developed world.

Some critics downplayed those benefits and warned that a lower corporate tax rate would deprive the government of too much revenue.

Since I don’t want politicians to have more money, that was not a persuasive argument. Moreover, I argued during the debate in 2017 that a lower corporate tax rate would generate “revenue feedback.”

In other words, there would be a “Laffer Curve” effect as corporations responded to a lower tax rate by earning and reporting more income.

Based on the latest fiscal data from the Congressional Budget Office (CBO), I was right.

Corporate tax revenues for the 2021 fiscal year (which ended on September 30) were $370 billion. As shown in this chart, that’s only slightly below CBO’s estimate back in 2017 of how much revenue would be collected – $383 billion – if the rate stayed at 35 percent.

The chart also shows CBO’s 2018 estimate of what revenues would be in 2021 with a 21 percent rate (and if you want more data, the Joint Committee on Taxation estimated that the Trump tax reform would reduce corporate revenues in 2021 by $131 billion).

This leads me to ask two questions.

1. Is this a slam-dunk argument for the Laffer Curve?
2. Did the lower corporate tax revenue generate so much revenue feedback that it was almost self-financing?

The answer to the first question almost certainly is “yes” but “don’t exaggerate” is probably the prudent response to the second question.

Here are a few reasons to be cautious about making bold assertions.

• CBO’s pre-TCJA estimate in 2017 may have been wrong for reasons that have nothing to do with the tax rate.
• CBO’s post-TCJA estimate in 2018 may have been wrong for reasons that have nothing to do with the tax rate.
• The surge of 2021 revenues may have been a one-time blip that will disappear or fade in the next few years.
• The coronoavirus pandemic, or the policy response from Washington, may be distorting the numbers.

These are all legitimate caveats, so presumably it would be an exaggeration to simply look at the above chart and claim Trump’s reduction in the corporate tax rate almost “paid for itself.”

But we can look at the chart and state that there was a lot of revenue feedback, which shows that the lower corporate tax rate did produce good economic results.

Perhaps most important, we now have more evidence that Biden’s plan to increase the corporate tax rate is very misguided. Yes, it’s possible that the President’s plan may generate a bit of additional tax revenue, but at a very steep cost for workers, consumers, and shareholders.

P.S. If you want an example of tax cut that was self-financing, check out the IRS data on how much the rich paid before and after the Reagan tax cuts.

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The Grim Economics of Higher Corporate Tax Rates

There are many reasons to reject Joe Biden’s proposal for higher corporate tax rates, and I listed many of them when I narrated this nine-minute video.

This two-minute video from the Tax Foundation has a similar message.

The main message is that workers, consumers, and shareholders are the ones who actually pay when suffer when politicians impose higher taxes on business.

And the damage grows over time because higher corporate tax rates reduce investment, which inevitably leads to lower wages.

By the way, while a low tax rate is very important, there are many other policy choices that determine the overall damage of business taxation.

• Is there double taxation of dividends?
• Is there worldwide taxation?
• Is there deprecation or expensing?
• Is there equal treatment of debt and equity?

This is just a partial list. There are other policies – such as alternative minimum taxation, book income, loopholes, and extenders – that also can increase the damage of the corporate taxation.

The bottom line is that we know the sensible approach to business taxation, but the Biden Administration is motivated instead by class warfare and grabbing revenue.

P.S. For more information on corporate taxation and wages, click here, here, here, here, and here.

P.P.S. For more information on corporate tax rates and corporate tax revenue, click here, here, here, and here.

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Can the Irish (Once Again) Save Civilization?

How the Irish Saved Civilization was a bestselling book in the mid-1990s.

Today, we’re going to consider an updated version, focusing on whether Ireland can save the world economy from Joe Biden’s plan for a global tax cartel.

This should be a slam-dunk issue. Ireland transformed itself from “The Sick Man of Europe” to the “Celtic Tiger” in part by adopting a 12.5 percent corporate tax rate.

How much of a tiger? Look at this data comparing per-capita gross domestic product in Ireland and France.

For what it’s worth, the Maddison data on gross domestic product makes Ireland look richer than it actually is (a result driven by largely by all the corporate activity).

So I also used World Bank data on gross national income to create a chart that tells a similar story, but with numbers that presumably are a closer match to actual economic conditions.

The bottom line is that Ireland’s policy on corporate taxation has been a success.

But that success has produced envy. High-tax nations such as France are big supporters of Joe Biden’s scheme to force all jurisdictions to have a corporate tax rate of at least 15 percent.

And that minimum rate inevitably will increase if politicians are able to create a cartel (indeed, some nations already are pushing for the rate to be 25 percent or above).

That’s the bad news.

The good news is that Ireland (as well as other nations such as Hungary and Estonia) presumably can block Biden’s tax cartel by using their “national veto” and preventing the European Union from being a participant.

But that means standing up to pressure.

For instance, the Associated Press recently reported on how France is trying to cajole Ireland into joining the cartel.

Emmanuel Macron was in Dublin for a one-day visit on Thursday, his first trip to Ireland since entering office. The State is facing calls from the French government to sign up to global tax reform. The country is one of only a handful of nations not to agree to a major Organisation for Economic Co-operation and Development (OECD) agreement on tax, which is backed by more than 130 countries worldwide, as well as the EU. …At a press conference in Dublin on Thursday, Mr Macron denied that he was putting pressure on the State on the issue. “This is for you to lead. This is not for France to put pressure. But I think the OECD framework works in the context,” Mr Macron said. “It makes sense in terms of co-operation. It makes sense in terms of the EU. …He said that the Irish economy had achieved “tremendous results” in recent decades and acknowledged that a low corporate tax base had been a crucial part of that success. “What you have managed to do in past decades is unique,” Mr Macron said. But he said that things had to change.

Saul Zimet and Dan Sanchez, writing for the Foundation for Economic Education, explained why Ireland should defends its fiscal sovereignty.

132 countries, including the twenty most powerful economies in the world, have all agreed to institute a minimum global corporate tax of 15 percent. …But, one hold-out is threatening to spoil the scheme. …Ireland has long had a 12.5 percent corporate tax… And this relatively low tax rate has drawn Facebook, Apple, Google, Pfizer, and many other corporate giants to set up regional headquarters or manufacturing hubs there instead of in countries with higher tax rates. …the flow of corporate wealth and opportunity into Ireland has resulted in enormous GDP growth and job growth for the nation in recent decades… Lower corporate taxes mean a bigger capital stock which means new jobs, higher wages, and more goods and services. That is why Ireland’s low corporate taxes have not just been good for multinational corporations, but for Irish workers, consumers, and entrepreneurs. …Jurisdictional competition, like market competition, is a good thing. It places a check on how tyrannical a government can be… So kudos to Ireland for bravely refusing to join what amounts to a 132-government tax cartel. By standing up for itself, it stood up for us all.

In a column for the Wall Street Journal, former Congressman Mick Mulvaney also opined in favor of Ireland.

The premise behind the minimum global corporate tax is simple: Most governments around the world are looking to raise money. But they don’t like taxing the middle class, as this tends to result in lost elections, and there aren’t enough rich people to soak to raise the necessary funds. That means that governments have started to look to corporations as piggy banks they can raid. …the Irish…rode a 12.5% corporate tax rate to an economic boom that has left many other European countries green with envy. …The Irish know what should be obvious to everyone: Their OECD partners can’t raise their corporate rates unless low-tax Ireland agrees to give up one of its largest competitive advantages in the global marketplace. …if you are losing a competition, there are two ways you can respond. One is to get better. The other is to prevent the competition from happening. …Ireland is on the front line of that battle today. Should it lose, the fight will be coming to our shores soon.

Mulvaney’s point about competition is spot on.

Joe Biden wants to raise the federal corporate tax rate from 21 percent to 28 percent, a policy that would give the United States (once again) the developed world’s most punitive system.

I don’t know if Biden is cognizant of the consequences, but his Treasury Secretary clearly understands that this means the United States will lose the battle for jobs and investment.

Which explains why the Biden Administration wants “to prevent the competition from happening.”

Let’s hope Ireland holds firm and says no to Biden’s anti-growth tax cartel.

P.S. For what it’s worth, Ireland failed to block the E.U.’s Lisbon Treaty back in 2009.

P.P.S. The current president of Ireland almost surely is on the wrong side, but fortunately he has very little power in the Irish system.

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Elizabeth Warren’s Demagoguery on “Book Income”

I’ve written about some boring and arcane tax issues – most of which are only relevant because we don’t have a simple and fair flat tax.

• Depreciation vs. expensing
• Territorial taxation vs. worldwide taxation
• GILTI rules for multinational firms
• Carry-forwards and net-operating losses
• Tax treatment of debt and equity

But I always try to explain why these complicated tax issues are important – assuming we want a competitive tax system that doesn’t needlessly undermine growth.

Today, we’re going to add to our collection of nerdy tax topics by discussing the issue of “book income” vs “tax income.”

I’m motivated to address this topic because the oleaginous senior senator from Massachusetts, Elizabeth Warren, indirectly addressed this issue in a recent column for the Washington Post.

Here’s some of what she wrote.

…scores of giant U.S. corporations pay zero. …In the three years following the 2017 Republican tax cuts, 39 megacorporations, including Amazon and FedEx, reported more than $122 billion in profits to their shareholders while using loopholes, deductions and exemptions to pay zero in federal income taxes. These companies boosted their stock prices and increased CEO pay by telling their shareholders they raked in hundreds of millions of dollars in profits, while simultaneously telling the Internal Revenue Service that they don’t owe any taxes. …We would require any company that earns more than $100 million in profits to pay a 7 percent tax on every dollar earned above that amount.

To assess Warren’s proposal, here are a couple of things that you need to understand.

1. What corporations report to their shareholders is “book income,” and that number is governed by a specific set of rules (“generally accepted accounting principles” or GAAP) determined by the Financial Accounting Standards Board. The goal is to make sure investors and others have accurate information.
2. What companies report to the Internal Revenue Service is “tax income” and that number is governed by a specific set of laws (the tax code) enacted over the past 100-plus years by politicians.

In other words, companies are not choosing to play games. They have no choice. They are following two separate sets of requirements that were set up for two separate reasons.

For purposes of public policy, the key thing to understand is that the tax code is based largely on cash flow (what was taxable income over the past 12 months, for instance).

That means it produces annual numbers that can be quite different than book income’s long-run data based on accrual accounting (the GAAP rules).

The Tax Foundation has a recent report, authored by Erica York and Alex Muresianu, that shows why it would be a major mistake to use book income for tax purposes.

Under corporate book income rules, companies spread out the cost of investments across roughly its useful life, also known as economic depreciation. The purpose of this rule is to match costs to the revenues they generate to best inform creditors and shareholders: deducting, say, the entire cost of a new factory the year it’s constructed could make it seem like a company is unprofitable to shareholders. While the economic depreciation approach makes some sense for accounting purposes, it’s a bad framework for tax policy. Spreading out the deductions over time creates a tax bias against investment. Deductions in future years are worth less than deductions in the current year, thanks to the time value of money and inflation. It also creates a bias against companies that rely heavily on physical capital (think energy production and high-tech manufacturing), and towards companies that mostly rely on labor (think financial services or fast food).

It’s unclear whether Senator Warren (or her staff) actually understand these technical details.

Not that it really matters. Her goal is to play class warfare. She’s engaging in demagoguery (a long-standing pattern) in hopes of enacting legislation that will give her a lot more money to spend.

If she’s successful, it will be very bad news for the economy, as Kyle Pomerleau explained in a 2019 report for the Tax Foundation.

According to the Tax Foundation General Equilibrium Model, this proposal would reduce economic output (GDP) by 1.9 percent in the long run. We also estimate that the capital stock would be 3.3 percent smaller and wages 1.5 percent lower, with about 454,000 fewer full-time equivalent jobs. …We estimate that the service price would rise by 2.6 percent under this proposal. A higher service price means that capital investment would become less attractive, leading to reduced investment and, eventually, a smaller capital stock. The smaller capital stock would lead to lower output, lower worker productivity, and lower wages. …Taxpayers in the bottom four income quintiles…would see a reduction in after-tax income of between 1.64 percent and 1.95 percent.

And here’s a table from Kyle’s report with all the economic consequences.

P.S. In her column, Sen. Warren also reiterated her support for a destructive wealth tax and more funding to reward a corrupt IRS.

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Winners and Losers from a Global Tax Cartel

I critiqued Biden’s proposal for a global corporate tax cartel as part of a recent discussion with South Africa’s Free Market Foundation.

Here’s the segment where I explain why it would be bad for developing nations.

At the risk of stating the obvious, Joe Biden is pushing this policy because he wants more tax revenue to fund his misguided plan for a bigger welfare state in the United States.

And the same is true for politicians in other big nations such as France, Japan, and Germany.

So as negotiations continue and rules are decided, rest assured that those countries will look after themselves and politicians from developing nations will be lucky to get a few crumbs from the table.

This discussion gives me a good excuse to put together this list of the potential winners and losers from a global tax cartel.

Since I slapped this together in five minutes, I won’t pretend it’s comprehensive.

But it’s hopefully more complete than a simple statement that politicians are the winners and people in the private sector are the losers.

Speaking of losers, my list includes “Nations with sensible tax policy,” and that’s a good reason to share this story from the New York Times. It’s about Janet Yellen’s efforts to convince Irish politicians to sacrifice their nation’s economic advantage.

The United States is hopeful that Ireland will drop its resistance to joining the global tax agreement… The agreement, which gained the support of the Group of 20 nations on Saturday, would usher in a global minimum tax of at least 15 percent. It would also change how taxing rights were allocated, allowing countries to collect levies from large, profitable multinational firms based on where their goods and services were sold. …Ms. Yellen held high-stakes meetings in Brussels this week with Paschal Donohoe, Ireland’s finance minister… She needs Mr. Donohoe’s support because the European Union requires unanimity among its members to formally join the deal.

So you may be wondering what Ms. Yellen said? Did she have some clever and insightful argument of how Ireland would benefit (or at least not be hurt) if politicians create a global tax cartel?

Nope. The best she could come up with is that Ireland’s tax system wouldn’t be as bad as the one she wants for the United States.

Ms. Yellen told her Irish counterpart that Ireland’s economic model would not be upended if it increased its tax rate from 12.5 percent…it would still have a large gap between its rate and the 21 percent tax rate on foreign earnings that the Biden administration has proposed.

And her weak argument is even weaker when you consider that she’s already pushing for a much-higher minimum tax.

The bottom line is that Ireland has reaped enormous benefits from its decision to enact a low corporate tax rate. But if a global tax cartel is imposed, it would simply be a matter of time before that country gets relegated to being an economic backwater on the periphery of Europe.

P.S. Part of the discussion in the video was about developing nations having the right to copy the economic model (no income tax and no welfare state) that enabled North American and Western Europe to become rich in the 1800s. Sadly, I don’t think many politicians in the developing world are interested in that approach nowadays, but rich nations shouldn’t make it impossible.

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Tax Cartels Mean Ever-Higher Tax Rates

When President Biden proposed a “global minimum tax” for businesses, I immediately warned that would lead to ever-increasing tax rates.

Ross Kaminsky of KHOW and I discussed how this is already happening.

I hate being right, but it’s always safe to predict that politicians and bureaucrats will embrace policies that give more power to government.

Especially when they are very anxious to stifle tax competition.

For decades, people in government have been upset that the tax cuts implemented by Ronald Reagan and Margaret Thatcher triggered a four-decade trend of lower tax rates and pro-growth tax reform.

That’s the reason Biden and his Treasury Secretary proposed a 15 percent minimum tax rate for businesses.

And it’s the reason they now want the rate to be even higher.

Though even I’m surprised that they’re already pushing for that outcome when the original pact hasn’t even been approved or implemented.

Here are some passages from a report by Reuters.

Treasury Secretary Janet Yellen will press G20 counterparts this week for a global minimum corporate tax rate above the 15% floor agreed by 130 countries last week…the global minimum tax rate…is tied to the outcome of legislation to raise the U.S. minimum tax rate, a Treasury official said. The Biden administration has proposed doubling the U.S. minimum tax on corporations overseas intangible income to 21% along with a new companion “enforcement” tax that would deny deductions to companies for tax payments to countries that fail to adopt the new global minimum rate. The officials said several countries were pushing for a rate above 15%, along with the United States.

Other kleptocratic governments naturally want the same thing.

A G7 proposal for a global minimum tax rate of 15% is too low and a rate of at least 21% is needed, Argentina’s finance minister said on Monday, leading a push by some developing countries… “The 15% rate is way too low,” Argentine Finance Minister Martin Guzman told an online panel hosted by the Independent Commission for the Reform of International Corporate Taxation. …”The minimum rate being proposed would not do much to countries in Africa…,” Mathew Gbonjubola, Nigeria’s tax policy director, told the same conference.

Needless to say, I’m not surprised that Argentina is on the wrong side.

And supporters of class warfare also are agitating for a higher minimum rate. Here are some excerpts from a column in the New York Times by Gabriel Zucman and Gus Wezerek.

In the decades after World War II, close to 50 percent of American companies’ earnings went to state and federal taxes. …it was a golden period. …President Biden should be applauded for trying to end the race to the bottom on corporate tax rates. But even if Congress approves the 15 percent global minimum corporate tax, it won’t be enough. …the Biden administration to give working families a real leg up, it should push Congress to enact a 25 percent minimum tax, which would bring in about $200 billion in additional revenue each year. …With a 25 percent minimum corporate tax, the Biden administration would begin to reverse decades of growing inequality. And it would encourage other countries to do the same, replacing a race to the bottom with a sprint to the top.

I can’t resist making two observations about this ideological screed.

1. Even the IMF and OECD agree that the so-called race to the bottom has not led to a decline in corporate tax revenues, even when measured as a share of economic output.
2. Since companies legally avoid rather than illegally evade taxes, the headline of the column is utterly dishonest – but it’s what we’ve learned to expect from the New York Times.

The only good thing about the Zucman-Wezerek column is that it includes this chart showing how corporate tax rates have dramatically declined since 1980.

P.S. For those interested, the horizontal line at the bottom is for Bermuda, though other jurisdictions (such as Monaco and the Cayman Islands) also deserve credit for having no corporate income taxes.

P.P.S. If you want to know why high corporate tax rates are misguided, click here. And if you want to know why Biden’s plan to raise the U.S. corporate tax rate is misguided, click here. Or here. Or here.

P.P.P.S. And if you want more information about why Biden’s global tax cartel is bad, click here, here, and here.

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Who Pays the Corporate Income Tax?

I’ve been arguing against Biden’s proposed increase in business taxation by pointing out that higher corporate taxes will be bad news for workers, consumers, and shareholders.

Everyone agrees that shareholders get hurt. After all, they’re the owners of the businesses. Higher corporate taxes directly reduce the amount of money available to be paid as dividends.

But we also should recognize that higher corporate taxes can be passed along to consumers, so they also lose. Even more important, we should recognize that higher tax burdens also reduce incentives for business investment, and this can have a negative impact on worker compensation.

A 2017 study from the Tax Foundation, authored by Steve Entin, thoroughly explored this question and included a table summarizing the academic research.

Alex Durante updated the Tax Foundation’s summary of the research in a just-released report.

Here are the results of two new studies.

In a large study of German municipalities over a 20-year period, Fuest et al. (2018) find that slightly more than half of the corporate tax burden falls on workers. …Baker et al. (2020) find that consumers could also be impacted by corporate tax changes. Looking at specific product prices with linked survey and administrative data at the state level, the authors found that a 1 percentage-point increase in the corporate tax rate increased retail prices by 0.17 percent. Combining this estimate with the wage response estimated in Fuest et al., the authors calculated that 31 percent of the corporate tax incidence falls on consumers, 38 percent on workers, and 31 percent on shareholders.

If you want more information about the German study, I wrote about it a couple of years ago. Solid research.

Here’s my two cents on the issue: Shareholders pay 100 percent of the direct costs of the corporate tax. But we need to also consider the indirect costs, most notably who bears the burden when there’s less investment and slower wage growth.

If you ask five economists for their estimates of indirect costs, you’ll probably get nine different answers. So it’s no surprise that there’s no agreement about magnitudes in the academic research cited above.

But they all agree that workers lose when corporate rates increase, and that’s a big reason why we can confidently state that Biden’s class-warfare agenda is bad for ordinary people.

The bottom line is that the person (or business) writing a check to the IRS isn’t the only person who suffers because of a tax.

And the lesson to learn is that we should be lowering the corporate, not increasing it.

P.S. Here’s my primer on the overall issue of corporate taxation.

P.P.S. Here’s some research about the link between corporate tax and investment.

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Deconstructing Biden’s Corporate Tax Cartel, Part II

Yesterday’s column explained why Biden’s proposed global cartel for corporate taxation was a bad idea.

In this clip from a recent panel hosted by the Austrian Economics Center in Vienna, I speculated on whether the plan would become reality.

I encourage you to watch the 4-minute video, but all you really need to know is that there are lots of obstacles to a cartel. Most notably, countries with pro-growth business tax regimes (such as Ireland, Estonia, and Switzerland in Europe) have big incentives to say no.

And if legislation is required in the United States, I assume that won’t be an easy sell, at least for GOP members.

But, as I warn in the video, the other side has hundreds of bureaucrats at the OECD and various finance ministries and treasury departments. And these taxpayer-financed mandarins have both the time and patience to chip away until they achieve their goals.

So it is critical that economists such as myself do a good job of educating policy makers about the adverse consequences of a tax cartel.

Which is why people should read this column by Veronique de Rugy of the Mercatus Center. Here are some key excerpts.

For several decades now, politicians around the world have tried to curtail tax competition to make it easier for them to increase the tax burdens on their citizens without them fleeing to other lower-tax jurisdictions. The best way to achieve their goal is to create a global high-tax cartel. …It’s no mystery why politicians don’t like tax competition. …The ability to shift residences and operations from country to country puts pressure on governments to keep taxes on income, investment, and wealth lower than politicians would like. Politicians in each country fear that raising taxes will prompt high-income earners and capital to move away. …Academic research shows that the imposition of higher corporate taxes is a highly destructive way to collect revenue because it lowers investment and, in turn, workers’ wages. It also increases consumer prices. Also, let’s face it, no nation has ever become wealthier and better through higher taxes and wealth redistribution.

This column for Prof. Bruce Yandle also is very informative. Here’s some of what he wrote.

It was with a feeling of deep disappointment…that I read Treasury Secretary Janet Yellen is…pushing to form an international cartel of governments that would implement a minimum corporate income tax rate across borders. …Efforts to cartelize taxation among nations will…, all else equal, lead to a higher-cost world economy. …Instead of searching high and low for ways to raise costs in the hope that more federal revenue and spending will follow, we should hope that our national leaders work harder to find better, more efficient ways to govern and serve the people. Doing so will give more people a much better chance at prosperity.

Amen. Tax harmonization was most accurately described by a former member of the European Parliament, who said it was a “thieves’ cartel.”

P.S. One of the worst aspects of the proposed tax cartel is that it will make it more difficult for poor countries to use good policy to improve living standards for their people.

P.P.S. Click here for my primer on tax competition.

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Deconstructing Biden’s Corporate Tax Cartel, Part I

When governments have to compete with each other, we get lower tax rates. That’s good for taxpayers and good for growth.

But politicians hate limits on their taxing power, which is why Biden has proposed a global tax cartel. Here are some of my remarks made yesterday on this topic.

If you don’t have time to watch the video, here are the key points I made when asked about the impact of Biden’s scheme.

• The tax cartel is a naked grab for more revenue.
• Higher taxes on businesses arguably are the worst way to collect more tax revenue. Indeed, both the IMF and OECD have research showing the destructive impact of higher corporate tax burdens.
• The global minimum tax will lead to a couple of additional bad consequences. 1) The 15 percent rate will be increased, and 2) Cartels will be created for other taxes.

I was then asked about whether there are better ways of generating revenue, particularly by having economic policies that lead to more growth.

This presumably was an opportunity for me to pontificate about the Laffer Curve, but I decided to make a more fundamental point about how politicians should not have more money.

• The burden of government spending already is excessive.
• The Rahn Curve shows that spending levels should be reduced.
• More taxes will lead to more spending.

I closed my remarks by pointing out that the world enjoyed an era of falling tax rates, which began when Reagan and Thatcher slashed tax rates about 40 years ago.

The average top personal tax rate in the developed world dropped from nearly 70 percent to just a bit over 40 percent.

The average corporate tax rate in industrialized nations dropped from nearly 50 percent to less than 25 percent.

Other nations didn’t copy the U.S. and U.K. because politicians were reading my boring articles about marginal tax rates. Instead, they only did the right thing because they were worried about losing jobs and investment.

One point I forgot to make (particularly in response to the second question) is that I should have explained that tax revenues as a share of GDP did not fall when tax rates were reduced.

Indeed, OECD data shows that tax revenues on income and profits (as a share of GDP) actually have risen during the period of falling tax rates.

The bottom line is that we need tax competition to protect us from “stationary bandits” who would produce “goldfish government.”

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Biden’s Global Tax Cartel: Bad News for Workers and Consumers

Biden’s tax agenda – especially the proposed increase in the corporate rate – would be very bad for American competitiveness.

We know this is true because the Administration wants to violate the sovereignty of other nations with a scheme that would require all nations to impose a minimum corporate tax rate of 15 percent.

Indeed, the White House openly says it wants to export bad policy to other nations “so that foreign corporations aren’t advantaged and foreign countries can’t try to get a competitive edge.”

Other big nations (the infamous G-7) just announced they want to participate in the proposed tax cartel.

I was just interviewed on this topic by the BBC World Service and I’ve extracted my most important quotes.

But I encourage you to listen to the full discussion, which starts with (predictably awful) comments from the French Finance Minister, followed by a couple of minutes of my sage observations.

For what it’s worth, “reprehensible” doesn’t begin to capture my disdain for what the politicians are trying to achieve.

What’s particularly irritating is that politicians want us to think that companies are engaging in rogue tax avoidance. Yet, as I noted in the interview, national governments already have the ability to reject overly aggressive forms of tax planning by multinational firms.

Here’s some of what was reported about the proposed cartel by the Associated Press.

The Group of Seven wealthy democracies agreed Saturday to support a global minimum corporate tax of at least 15%… U.S. Treasury Secretary Janet Yellen said the agreement “provides tremendous momentum” for reaching a global deal that “would end the race-to-the-bottom in corporate taxation…” The endorsement from the G-7 could help build momentum for a deal in wider talks among more than 135 countries being held in Paris as well as a Group of 20 finance ministers meeting in Venice in July. …The Group of 7 is an informal forum among Canada, France, Germany, Italy, Japan, the UK and the United States. European Union representatives also attend. Its decisions are not legally binding, but leaders can use the forum to exert political influence.

As you just read, the battle is not lost. Hopefully, the jurisdictions with good corporate tax policy (Ireland, Bermuda, Hong Kong, Cayman Islands, Switzerland, etc) will resist pressure and thus cripple Biden’s cartel.

I’ll close by emphasizing that the world needs tax competition as a necessary check on the greed of politicians. Without any sort of constraint, elected officials will over-tax and over-spend.

Which is why they’re trying to impose a tax cartel. They don’t want any limits on their ability to buy votes with other people’s money.

And we can see from Greece what then happens.

P.S. The Trump Administration also was awful on the issue of tax competition.

P.P.S. Here’s my most-recent column about the so-called “race to the bottom.”

P.P.P.S. As noted in the interview, both the IMF and OECD have research showing the destructive impact of higher corporate tax burdens.

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Four Fiscal Policy Lessons from Ireland

In the world of public finance, Ireland is best known for its 12.5 percent corporate tax rate.

That’s a very admirable policy, as will be momentarily discussed, but my favorite Irish policy was the four-year spending freeze in the late 1980s.

I discussed that fiscal reform in a video about 10 years ago, and I subsequently shared data on how spending restraint reduced the overall burden of government in Ireland and also lowered red ink.

It’s a great case study showing the beneficial impact of my Golden Rule.

Spending restraint also paved the way for better tax policy, and that’s a perfect excuse to discuss Ireland’s pro-growth corporate tax system. The Wall Street Journal opined last week about that successful supply-side experiment.

Democrats want a high global minimum tax that would end national tax competition and reduce the harm from their huge tax increase on U.S. business. But tax competition has been a boon to global growth and investment, as Ireland’s famous low-tax policy makes clear. Far from a “race to the bottom,” Ireland adopted policies that were ahead of their time and helped its economy grow from a backwater into a Celtic tiger. …in the late 1990s …an EU mandate led Dublin to…pioneer…a new strategy: Apply the same low tax rate to every business. Policy makers settled on 12.5%, which was a tax increase for some companies but a cut for others. This was a classic flat-tax reform… Ireland has reaped the benefits. Between 1986 and 2006, the economy grew to nearly 140% of the EU average from a mere two-thirds. Employment nearly doubled to two million, and the brain drain of the 1970s and 1980s reversed. …Oh and by the way: After Ireland slashed its rate and broadened the corporate-tax base, tax revenue soared. Except for the post-2008 recession and its aftermath, corporate-profits taxes in some years account for about 13% of total revenue and exceed 3% of GDP. That’s up from as low as 5% of revenue and less than 2% of GDP before the current tax rate was introduced.

That’s a lot of great information, particularly the last couple of sentences about how Ireland collected more revenue when the corporate tax rate was slashed.

Indeed, I discussed that remarkable development in Part II of my video series on the Laffer Curve (and it’s not just an Irish phenomenon since both the IMF and OECD have persuasive global data on lower corporate tax rates and revenue feedback).

Though higher revenue is not necessarily a good thing.

I complained back in 2011, for example, about how Irish politicians began to spend too much money once a booming economy began to generate a lot of tax revenue.

Which is a good argument for a Swiss-style spending cap in Ireland.

Let’s wrap up by considering some fiscal lessons from Ireland. Here are four things everyone should know.

1. Spending restraint is a powerful tool to achieve smaller government..
2. Lower tax rates on productive behavior lead to jobs and prosperity.
3. Lower corporate tax rates can generate substantial revenue feedback.
4. A spending cap is needed to maintain long-run fiscal discipline.

Good rules for Ireland. Good rules for any nation.

P.S. Ireland has definitely prospered in recent decades, but GNI data gives a more accurate picture than GDP data.

July 29, 2021 Addendum: This chart shows the growth Ireland has experienced since starting to adopt pro-market policies in the mid-1980s.

Even though the nation got hit hard by the financial crisis, it is still far ahead of where it was before reforms.

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Biden’s Tax Plan Contains a Poison Pill for American Firms that Compete in Global Markets

As explained here, here, here, and here, I don’t like Biden’s class-warfare tax policy.

I’m especially concerned about his approach to business taxation.

1. He wants to penalize American-based companies with the highest corporate tax rate among all developed nations.
2. He wants to export that bad policy to the rest of the world with a “global minimum tax” – sort of an OPEC for politicians.
3. He wants to handicap American multinational companies with taxes that don’t apply to foreign-based firms.

Regarding the third point, I wrote a column on that topic for the Orange County Register.

Here’s how I described Biden’s proposal.

Biden has proposed several tax increases that specifically target American firms that compete in world markets. Most notably, the Administration has proposed to double the tax rate on “global intangible low-tax income” (GILTI) from 10.5 percent to 21 percent. Translated from tax jargon to English, this is largely a tax on the income American firms earn overseas from intellectual property, most notably patents and royalties. Keep in mind, by the way, that this income already is subject to tax in the nations where it is earned. Most other nations do not handicap their companies with similar policies, so this means that American firms will face a big competitive disadvantage – especially when fighting for business in low-tax jurisdictions such as Hong Kong, Ireland, Singapore, Switzerland, and most of Eastern Europe.

And here are some additional reasons why it is very bad news.

…let’s simply look at the bottom-line impact of what Biden is proposing. The Tax Foundation estimates that, “The proposal would impose a 9.4 percent average surtax on the foreign activities of U.S. multinationals above and beyond the taxes levied by foreign governments” and “put U.S. multinationals at a competitive disadvantage relative to foreign corporations.” …a stagging $1.2 trillion tax increase on these companies. …This is not just bad for the competitiveness of American-based companies, it is also bad policy. Good fiscal systems, such as the flat tax, are based on “territorial taxation,” which is the common-sense notion that countries only tax economic activity inside their borders. …Many other nations follow this approach, which is why they will reap big benefits if Biden’s plan to hamstring American companies is approved. The key thing to understand is that the folks in Washington have the power to raise taxes on American companies competing abroad, but they don’t have the ability to raise taxes on the foreign companies in those overseas markets.

The Wall Street Journal‘s editorial page has been sounding the alarm on this issue as well.

Here are some excerpts from an editorial back in April.

…the tax on global intangible low-tax income, known as Gilti, which was created by the 2017 tax reform. …Gilti was flawed from the start…but Mr. Biden would make it worse in every respect. …The 2017 tax law set the statutory Gilti rate at…10.5%. Mr. Biden would increase that to 21%… the effective rate companies actually pay is higher. This is because Gilti embedded double taxation in the tax code. …Gilti allows a credit of only 80% of foreign taxes, with no carry-forwards or carry-backs. …Raising the statutory rate to 21% increases that effective rate to 26.25%. This new Biden effective minimum tax would be higher than the statutory tax rates in most countries even in Western Europe… The Biden plan would further increase the effective Gilti rate by expanding the tax base on which it’s paid. …A third Biden whammy would require companies to calculate tax bills on a country-by-country basis. …Requiring companies to calculate taxable profits and tax credits individually for every country in which a company operates will create a mountain of compliance costs for business and work for the Internal Revenue Service. …The Biden Administration and its progressive political masters have decided they don’t care about the global competitiveness of American companies.

Let’s close with some international comparisons.

According to the most-recent International Tax Competitiveness Index, the United States ranks #21 out of 35 nations, which is a mediocre score.

But the United States had been scoring near the bottom, year after year, before the Trump tax reform bumped America up to #21. So there was some progress.

If the Biden plan is approved, however, it is a near-certainly that the U.S. will be once again mired at the bottom. And this bad policy will lead to unfortunate results for American workers and American competitiveness.

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Three Reasons to Reject Biden’s Tax Harmonization Scheme for “Global Minimum Taxation”

Way back in 2007, I narrated this video to explain why tax competition is very desirable because politicians are likely to overtax and overspend (“Goldfish Government“) if they think taxpayers have no ability to escape.

The good news is that tax competition has been working.

As explained in the above video, there have been big reductions in personal tax rates and corporate tax rates. Just as important, governments have reduced various forms of double taxation, meaning lower tax rates on dividends and capital gains.

Many governments have also reduced – or even eliminated – death taxes and wealth taxes.

These pro-growth tax reforms didn’t happen because politicians read my columns (I wish!). Instead, they adopted better tax policy because they were afraid of losing jobs and investment to countries with better fiscal policy.

Now for the bad news.

There’s been an ongoing campaign by high-tax governments to replace tax competition with tax harmonization. They’ve even conscripted international bureaucracies such as the Organization for Economic Cooperation and Development (OECD) to launch attacks against low-tax jurisdictions.

And now the United States is definitely on the wrong side of this issue.

Here’s some of what the Biden Administration wants.

The United States can lead the world to end the race to the bottom on corporate tax rates. A minimum tax on U.S. corporations alone is insufficient. …President Biden is also proposing to encourage other countries to adopt strong minimum taxes on corporations, just like the United States, so that foreign corporations aren’t advantaged and foreign countries can’t try to get a competitive edge by serving as tax havens. This plan also denies deductions to foreign corporations…if they are based in a country that does not adopt a strong minimum tax. …The United States is now seeking a global agreement on a strong minimum tax through multilateral negotiations. This provision makes our commitment to a global minimum tax clear. The time has come to level the playing field and no longer allow countries to gain a competitive edge by slashing corporate tax rates.

As Charlie Brown would say, “good grief.” Those passages sound like they were written by someone in France, not America

And Heaven forbid that  countries “gain a competitive edge by slashing corporate tax rates.” Quelle horreur!

There are three things to understand about this reprehensible initiative from the Biden Administration.

1. Tax harmonization means ever-increasing tax rates – It goes without saying that if politicians are able to create a tax cartel, it will merely be a matter of time before they ratchet up the tax rate. Simply stated, they won’t have to worry about an exodus of jobs and investment because all countries will be obliged to have the same bad approach.
2. Corporate tax harmonization will be followed by harmonization of other taxes – If the scheme for a harmonized corporate tax is imposed, the next step will be harmonized (and higher) tax rates on personal income, dividends, capital gains, and other forms of work, saving, investment, and entrepreneurship.
3. Tax harmonization denies poor countries the best path to prosperity – The western world became rich in the 1800s and early 1900s when there was very small government and no income taxes. That’s the path a few sensible jurisdictions want to copy today so they can bring prosperity to their people, but that won’t be possible in a world of tax harmonization.

P.S. If you want more information, here’s a three-part video series on tax havens, and even a video debunking some of Obama’s demagoguery on the topic.

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Dishonest Tax Analysis from the New York Times

There are two big policy debates about business profits.

The first is whether profits are good or evil. I pick the former. Profits are something to applaud, assuming they are earned honestly (i.e., not the result of subsidies, industrial policy, protectionism, or other forms of cronyism).

The second is how profits should be taxed, and that’s the focus of today’s column.

My perfect-world answer is that there should be no tax on profits because we have a government that is so small that there’s no need for any type of income tax. But I’m in the United States rather than a fiscal paradise such as Bermuda, Monaco, or the Cayman Islands. So if we start with the assumption that a corporate income tax is going to exist, how should it operate?

To answer that question, let’s start with this simple example of a kid’s lemonade stand. Here’s how much money it spent and how much revenue it generated (before it was shut down by overzealous bureaucrats).

How much profit did our budding entrepreneur make?

The correct answer, of course, is that the business didn’t earn any profits. Indeed, it lost $2. So there obviously should not be any tax.

But some people don’t understand the difference between taxable income (which is largely based on cash flow in one year) and “book income” (which is largely a backward-looking, accrual-based estimate of profits to help inform shareholders about the overall financial condition of a corporation).

Or, maybe they do understand and simply prefer to engage in dishonest demagoguery. For instance, let’s look at a recent report by Patricia Cohen in the New York Times.

…a new study finds that at least 55 of America’s largest paid no taxes last year on billions of dollars in profits…thanks to a range of legal deductions and exemptions that have become staples of the tax code, according to the analysis. Salesforce, Archer-Daniels-Midland and Consolidated Edison were among those named in the report, which was done by the Institute on Taxation and Economic Policy, a left-leaning research group in Washington. …Twenty-six of the companies listed, including FedEx, Duke Energy and Nike, were able to avoid paying any federal income tax for the last three years even though they reported a combined income of $77 billion. Many also received millions of dollars in tax rebates.

Sounds terrible, right.

Except if you read the fine print, in which case you’ll find out the report discussed in the article isn’t based on company tax returns. Instead, the leftist group, the Institute on Taxation and Economic Policy (ITEP), used financial statements to make up some numbers.

And ITEP’s use of book income meant it didn’t properly measure things such as business investment expenditures and net operating losses, which are necessary to determine whether a company has an actual cash-flow profit.

Ms. Cohen never should have written a story about ITEP’s shoddy and dishonest report, though at least she acknowledged that there are reasons to question the findings.

A provision in the 2017 tax bill allowed businesses to immediately write off the cost of any new equipment and machinery. The $2.2 trillion CARES Act…included a provision that temporarily allowed businesses to use losses in 2020 to offset profits earned in previous years, according to the institute. …many deductions and credits are there for good reason — to encourage research and development, to promote expansion and to smooth the ups and downs of the business cycle, taking a longer view of profit and loss than can be calculated in a single year.

The bottom line is that the ITEP report is garbage.

There’s no reason to expect taxable income to match up with financial statements or “book income.”

Indeed, the differences between those measures is why there are also companies that – according to ITEP’s sloppy methodology – pay tax when they supposedly have losses.

For those who actually care about the truth, the top half of this visual shows how a proper business tax system should work (i.e., one that taxes profits when they actually occur).

P.S. The issue of “depreciation” is probably the main reason why we get all sorts of silly tax controversies, involving everything from corporate jets to ABBA’s stage outfits.

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Five Visuals that Explain Why Higher Corporate Income Tax Rates Are Bad for America

I have a four-part series (here, here, here, and here) about the conceptual downsides of Joe Biden’s class-warfare approach to tax policy.

Now it’s time to focus on the component parts of his agenda. Today’s column will review his plan for a big increase in the corporate tax rate. But since I’ve written about corporate tax rates over and over and over again, we’re going to approach this issue is a new way.

I’m going to share five visuals that (hopefully) make a compelling case why higher tax rates on companies would be a big mistake.

Visual #1

One thing every student should learn from an introductory economics class is that corporations don’t actually pay tax. Instead, businesses collect taxes that are actually borne by workers, consumers, and investors.

There’s lots of debate in the profession, of course, about which group bears what share of the tax. But there’s universal agreement that higher taxes lead to less investment, which leads to less productivity, which leads to lower pay.

Here’s a depiction of the relationship of corporate taxes and worker pay.

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Visual #2

The previous image explains the theory. Now it’s time for some evidence.

Here’s a look at how much faster wages have grown in countries with low corporate tax rates compared to nations with high corporate tax rates.

Biden, for reasons beyond my comprehension, wants America on the red line.

And his staff economists apparently don’t understand (or don’t care about) the link between investment and wages.

Visual #3

Here’s some more evidence.

And it comes from an unexpected source, the pro-tax Organization for Economic Cooperation and Development (OECD).

Even economists at that Paris-based bureaucracy have produced studies confirming that lower tax rates lead to higher disposable income for people.

Needless to say, if lower tax rates lead to more disposable income, then higher tax rates will lead to less disposable income.

We should have learned during the Obama years that ordinary people pay the price when politicians practice class warfare.

Visual #4

It’s very bad news that Biden wants a big increase in the corporate tax rate, but let’s not forget that the IRS double-taxes corporate income (i.e., that same income is subject to a second layer of tax when shareholders receive dividends).

The combined effect, as shown in this visual, is that the United States will have the dubious honor of having the highest effective corporate tax rate in the entire developed world.

Call me crazy, but I don’t think that’s a recipe for jobs and investment in America.

Visual #5

The economic damage of higher corporate tax rates means that there is less taxable income (i.e., we need to remember the Laffer Curve).

Will the damage be so extensive, causing taxable income to fall so much, that the IRS collects less revenue with a higher tax rate?

We’ll learn the answer to that question over time, but we have some very strong evidence from the IMF that lower corporate tax rates don’t lead to less revenue. As you can see from this chart, revenues held steady as tax rates plummeted over the past few decades.

In other words, lower rates led to enough additional economic activity that governments have collected just as much money with lower tax rates. But now Biden wants to run this experiment in reverse.

It’s possible the government will collect more revenue, of course, but only at a very high cost to workers, consumers, and shareholders.

By the way, there’s OECD data showing the exact same thing.

Those pictures probably tell you everything you need to know about this issue.

But let’s add some more analysis. The Wall Street Journal opined today on Biden’s class-warfare agenda. Here are some of the key passages from the editorial.

The bill for President Biden’s agenda is coming due, starting with Wednesday’s proposal for the largest corporate tax increase in decades. …Mr. Biden’s corporate increase amounts to the restoration of the Obama-era corporate tax burden, only much more so. …Mr. Biden wants to raise the corporate rate back up to 28%, but that’s the least of his proposals. He also wants to add penalties that would make inversions punitive, and he’d impose a global minimum corporate tax of 21%. This would shoot the tax burden on U.S. companies back toward the top of the developed world list. …The larger Biden goal is to end global tax competition… “The United States can lead the world to end the race to the bottom on corporate tax rates,” says the White House fact sheet. Mr. Biden says he wants “other countries to adopt strong minimum taxes on corporations” so nations like Ireland can no longer compete for capital with lower tax rates. This has long been the dream of the French and Germans, working through the Organization for Economic Cooperation and Development. …All of this is in addition to the looming Biden tax increases on dividends, capital gains and other investment income. …Mr. Biden’s corporate tax increases will hit the middle class hard—in the value of their 401(k)s, the size of their pay packets, and what they pay for goods and services.

Amen.

Let’s conclude with some gallows humor.

This meme shows how some of our leftist friends will celebrate if the tax increase is imposed.

P.S. Here’s a depressing final observation. Decades of experience have led me to conclude that many folks on the left support class-warfare tax policy because they are primarily motivated by a spiteful desire to punish success rather than provide upward mobility for the poor.

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What Biden’s Corporate Tax Increase Means for American Competitiveness

Thanks to globalization (as opposed to globalism), jobs and investment are now very mobile. This means the costs of bad policy are higher than ever before, and it also means the benefits of good policy are higher than ever before.

Which is why it’s very useful to look at various competitiveness rankings, most notably the ones that are comprehensive (most notably Economic Freedom of the World and the Index of Economic Freedom).

But since my specialty is public finance, I’m also interested in measures of fiscal competitiveness (best tax system, worst tax system, costliest welfare state, etc).

Today, let’s narrow our focus and look at business tax competitiveness. This is an area where the United States traditionally has lagged, both because we used to have one of the world’s highest corporate tax rates and because onerous tax rules put U.S.-based companies at an added disadvantage.

Trump lowered the federal corporate tax rate from 35 percent to 21 percent, which definitely helped, but now Biden wants to push the rate back up to 28 percent.

What will that mean for U.S. competitiveness?

It’s not good news.

The Tax Foundation calculated the combined tax rate on business income (including the double tax on dividends) for various developed nations.

As you can see, America will have the most onerous tax regime if Biden is successful.

What if we look only at the corporate tax rate? And what if we consider every jurisdiction in the world?

Professor Robert McGee pulled together all the numbers and ranked nations from #1 to #223.

The United States currently is in the bottom half, which isn’t good since we’re below average. But you can see from these two tables that Biden will drop America to the bottom 10 percent.

Needless to say, it’s not good to rank below France.

But let’s think of the glass as being 1/10th full rather than 9/10ths empty. At least the U.S. beats Venezuela!

The bottom line is that it will not be good news if Biden’s plan is enacted.

P.S. From Professor McGee’s study, here are the jurisdictions tied for 1st place.

P.P.S. Needless to say, politicians from high-tax nations resent the 15 jurisdictions that don’t have a corporate income tax.

Indeed, that’s why many of those politicians are pushing the “global minimum tax” that I wrote about yesterday.

Those politicians basically want to turn back the clock and reverse the progress depicted in this set of charts from the Tax Foundation.

P.P.S. This is why it’s important to defend the liberalizing process of tax competition.

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