The finance ministers of more than 130 nations and territories have arrived at a tentative agreement to create a tax floor – a minimum corporate tax rate of a proposed 15 percent. Its proponents, sadly including Canada, claim it will create a “level playing field” and stop a “race to the bottom.”
Some nations face a harsh choice: lower corporate taxes to retain and attract domestic and foreign investors, or lose revenue, which will have to be made up by raising personal income taxes and other taxes.
This tentative agreement has other features, including more precise and narrow definitions of intellectual property, digital commerce, transfer pricing and allocation or attribution of revenues, costs, profit or other flows by region or other criteria.
There are also the usual bleats of “fair share.”
Several points undermine the case of these eager governmental money-grabbers.
The first is the arbitrariness of 15 percent. Why 15 percent and not 10 or 20 percent? Presumably, the former number would be too low to satisfy some and the latter too high based on what they currently levy. Ultimately, it was a negotiated compromise and not demonstrably based on optimization studies.
The next issue is that it would disadvantage some nations that have low corporate tax rates. A key part of Ireland’s success – after a financial near-death in 2008-10 – is its 12.5 percent corporate tax rate. This is lower than most other nations, especially advanced rich ones. Ireland’s per capita gross domestic product is now higher than that of the United Kingdom, the United States, the Scandinavian nations and Qatar. Only Luxembourg has a higher GDP, and it’s also a low-tax locale.
Raising corporate income tax rates would hurt firms’ profitability, their operating cash flow, and their available funds to reinvest and grow their businesses.
Employment growth and wages would suffer from reduced economic growth. Economic growth that’s lower than forecasted will hurt government tax revenues from personal income taxes, excise taxes, property taxes, sales taxes and value-added taxes (VAT).
Governments would be tempted or compelled to reduce services or raise other taxes to make up the shortfall in corporate and other growth-sensitive taxes, which would almost certainly fall on working citizens, reducing their standard of living.
The third issue is the belief that corporate income tax revenue is a big and vital part of overall government receipts. It’s not. Using Organization for Economic Co-operation and Development (OECD) data, the Tax Foundation found that corporate income tax revenue, on average, is just 9.6 percent of total national income.
So if Ireland had this OECD average share from firms and had to raise it by 20 percent – from 12.5 to 15 percent – it would gain a little less than two percent from the exercise, at the expense of damaging its economy and people.
Yet Ireland derives 14.4 percent of its total tax take from corporate income taxes, nearly five percent more than the OECD average. By keeping its rate low, it has actually increased its total revenue.
Sovereignty is one of the most important concerns. By agreeing to such a tax treaty, Canada and other nations would be bound by its terms and be unable to lower taxes, except perhaps at the provincial, territorial or local level.
If Canada were in a recession, low-growth stagnation, a war or similar emergency, it might want to suspend, drastically cut or eliminate corporate income taxes.
Subnational regions such as provinces or states could also lower their taxes or make them negative to attract business, as sometimes happens now.
There are ways to game the system. The draft treaty could prohibit or limit this, but there could be other ways around it. National governments could transfer large sums to provinces or states, allowing them to keep their business taxes low. Corporate income taxes could also be rejigged to have much more generous capital cost allowances, investment tax, research and development or hiring and training credits.
There are other reasons not to believe the sincerity of the motives of the major proponents of this idea. The new United States administration wants to raise corporate and personal income taxes, to pare its enormous deficit. This will make the U.S. far less attractive to investors and companies who may want to enter or expand in the U.S. market.
It will also be less attractive to high-income or highly-skilled professionals, entrepreneurs, financiers, inventors, and technical or scientifically trained people.
Progressives always like raising taxes and are always less than hospitable toward business and free markets.
This also gives cover to governments that are far too lazy, cautious or scared to become more efficient, eliminate bad programs, sell off unneeded assets, lower their costs and constrain spending.
The excuse of the pandemic is wearing thin. The economic recovery is well underway. Gradual lowering of taxes could well bring more benefits and higher revenues than raising them on corporations.
Corporate income taxes are only one thing businesses and investors look at before committing money. They are also looking for:
- the strong rule of law;
- firm property and commercial rights;
- abundant, affordable and accessible sources of energy;
- high-quality infrastructure;
- smooth, quick import and export, regardless of tariff levels, including extensive and widespread trade agreements;
- high-quality, educated labour forces and technical services;
- stable, understandable and reasonable regulatory regime;
- safety and security;
- relatively stable politics;
- receptive and business-friendly government and society;
- easy, quick and relatively inexpensive permitting and project approval processes.
Governments have enough problems meeting all of those requirements. Raising taxes on companies and high-income achievers will only make things worse.
Governments need to make better choices and be forthright about what is and isn’t affordable. Raising corporate income taxes may look good to a few loud people but it will harm everyone.
Ian Madsen is a senior policy analyst with the Frontier Centre for Public Policy.
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