If you aren’t already cynical about politics, an examination of the politics underlying the tentative agreement of 130 national governments to harmonize their laws regarding how much to tax the profits of multinational enterprises (MNEs) provides plenty of reasons to be cynical.
First is the hypocrisy that, at a time when the Biden administration is accusing the largest American corporations of being too insulated from competition, Treasury Secretary Janet Yellen is colluding with foreign officials to severely limit competition between governments. Numerous federal employees (paid by our taxes) are collaborating with bureaucrats of the Organization for Economic Cooperation and Development (a multilateral agency whose major funding comes from our tax dollars) to find ways to raise American taxes.
“Your tax dollars at work,” as the rueful saying goes.
The fact is that just as businesses compete for consumers by (among other things) lowering prices, so governments have competed to attract MNEs to domicile in their jurisdictions by imposing lower corporate tax rates. We can see this dynamic in the United States today, where nine states are in the process of cutting taxes, and net migration trends show taxpayers relocating from high-tax to low-tax states.
The problem for the United States in recent decades is that the U.S. government has had a top corporate profits tax rate higher than that of most other countries. This has induced some formerly U.S.-based corporations to redomicile in jurisdictions with lower tax rates. Politicians and ideologues on the left have fumed about this alleged “injustice.”
Former Secretary of State John Kerry resorted to scorched-earth rhetoric, invoking the name of our country’s most infamous traitor, blasting CEOs who moved offshore as “Benedict Arnold CEOs.” Similarly, President Barack Obama’s secretary of the treasury, Jack Lew, implored companies to practice “economic patriotism” and stay put. This is like asking the chicken you’re about to behead to stop squirming. CEOs who moved corporate headquarters overseas weren’t anti-American, they were simply discharging their fiduciary responsibilities to try to thrive in a competitive global marketplace. It’s no more “unfair” for corporations to take steps to minimize their tax bill than it is for you and me to do so by claiming the exemptions, deductions, and credits available to us.
Instead of driving American businesses away with relatively confiscatory tax rates, Obama should have done what President Donald Trump did—lower corporate tax rates and treat businesses as allies, not adversaries. The right approach is to convey to businesses the traditional American message: We welcome your presence here and invite you to earn as much as you can in service to consumers.
In his zeal to undo everything Trump did to strengthen the U.S. economy, Biden wants to raise the corporate tax rate. Knowing that doing so independently of other countries would render U.S. MNEs less globally competitive and that it might trigger a new rush of American businesses either moving or parking overseas profits offshore, the Biden team has been trying to get foreign governments to agree to put a floor under their own corporate tax rates.
Yellen has frequently described the decades-long trend toward lower corporate tax rates as “a race to the bottom.” While it’s been a slow-motion “race,” the word “bottom” is somewhat appropriate, since the bottom tax rate is zero, and corporate profits taxes were generally moving in that direction. While “race to the bottom” has an obviously negative connotation, from an economic standpoint, the lower the corporate tax rate, the better.
The optimal and most economically fair and rational corporate profits tax rate is zero. As an economist, Yellen surely knows that corporations don’t pay taxes; people do. Corporations merely act as unpaid tax collectors for the government. Corporate taxes are shifted “forward” in the form of higher prices to consumers and also shifted “backward” to the employees and owners of the business.
A 2017 Tax Foundation article has copious economic literature detailing how the majority of corporate profits taxes are actually paid for by employees in the form of lower wages and benefits. This helps to explain why wages rose so strongly in the wake of Trump’s corporate tax cut.
For Democrats, advocating higher taxes on corporate profits is a matter of political expediency, not sound economics. Calling on large, hugely profitable companies to pay “their fair share” is effective political demagoguery. It fools average citizens into thinking that their own tax burden is lighter, even though it’s ultimately workers, consumers, and owners who pay every penny of that tax. Also, politicians know that indirect taxes are easier to sell to the public than direct taxes. Corporate taxes are indirect—they’re paid by citizens to the government through an intermediary entity, the business. Personal income taxes, by contrast, are direct—they’re paid by the citizen directly to the government.
Corporate profits taxes are known to economists to be a very inefficient type of tax to collect. They cause economic distortions, and the costs of compliance impose a deadweight burden on businesses. Critics constantly complain about the unfairness of some corporations paying higher rates than others due to various exemptions, deductions, reporting rules, and so forth, and there’s some validity to this criticism. There’s only one truly just rate—a rate whereby every corporation would pay the same tax rate—and that rate is zero.
One question I have about the tentative agreement is whether the higher U.S. tax revenues that Team Biden is hoping to bring in might be offset by the concessions that the United States has to make to induce other governments to swear off lower corporate tax rates. The most notable of these concessions so far is to grant permission to European governments to tax lucrative mega-giant high-tech companies, such as Apple, Google, and Facebook.
I wonder if new foreign taxes on those American MNEs will result in a net loss of revenues that Uncle Sam hopes to collect from those companies. At a time of increasingly gigantic federal deficits, wouldn’t it be counterproductive to divert possible U.S. taxes to foreign governments? Not knowing the details of the tentative agreement or what its final terms will be, it’s possible that this potential revenue loss will be averted, but it’s an angle worth looking at closely.
Not that it’s a realistic political possibility, but what would happen if the corporate profits tax were abolished? The big spenders in Washington obviously would have to make a choice between replacing the lost revenues with other taxes (probably higher personal income taxes on all but poor people) or reducing spending. Good luck with that!
Lest you jump to the false conclusion that I’m a corporate shill, let me suggest, as a starting point for budgetary reform, an end to the several hundred billion dollars per year of corporate subsidies and other forms of cronyism currently contributing to our bloated federal deficit. When you press progressives on that issue, however, they find a way to justify business subsidies. And the last thing the progressives want to do is to rein in their spending extravaganza. I doubt they would have the courage to take the direct tax route and propose higher income tax rates. It’s more likely that they would expect the Federal Reserve to monetize the spending.
What we have here with this plan to establish a new globalist code for taxing MNEs is yet another triumph of political expediency over sound economics. As a learned economist, Treasury Secretary Yellen knows that corporate taxes are highly problematic and that squelching competition—even between governments—decreases overall prosperity. She also knows, as the previous chair of the Federal Reserve System, that a primary mandate of the Fed is to boost employment, yet she advocates chipping away at Trump’s corporate tax cut that gave a pronounced boost to employment. She surely isn’t doing her successor, Jerome Powell, any favors by calling for higher corporate taxes.
How do we explain such strange goings-on? It all stems from the fact that, as secretary of the treasury, she must do the president’s bidding. She reminds me of a long-ago treasury secretary, Salmon Chase. While serving as secretary under Abraham Lincoln in the Civil War, Chase dutifully sold Congress on the need for a fiat currency (the famous “greenbacks”) to help finance the war. After the war, in 1870 while serving as chief justice of the Supreme Court, Chase cast the deciding vote that ruled greenbacks to be unconstitutional. Different job, different priorities.
I’d like to think that Yellen is taking the positions she’s taking as a loyal lieutenant of the president, rather than as an economist. It really doesn’t matter, though. What does matter is the damage that’s being done by runaway spending and economically unsound policies.
Mark Hendrickson, an economist, recently retired from the faculty of Grove City College, where he remains a fellow for economic and social policy at the Institute for Faith and Freedom.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.