Tax Maximizers: Good Greed and Bad Greed
By Pierre Lemieux
Greed is good or useful when greedy people automatically serve the interests of their fellow humans; exchange on free markets is the paradigmatic case. Greed is bad when it works by exploiting or dominating others, including through political force or deceit. At least, that is the way an economist would think if he is willing to make a value judgment in favor of the consumer, which is what he generally does when evaluating a public policy or an economic system.
Assuming that a corporate income tax is justifiable, we can apply the same principle to the international corporate tax system and to the new minimum tax proposed by the G-7 governments (Paul Hannon, Richard Rubin and Sam Schechner, “G-7 Nations Agree on New Rules for Taxing Global Companies,” Wall Street Journal, June 5, 2021).
In the current system, national states may compete in attracting international corporations with lower taxes. The governments who thus compete are greedy: by attracting corporations from states that tax more, they gain more revenues. But the result is to provide incentives for governments not to tax their countries’ corporations at too high rates. This state greed through tax competition is beneficial to most people. The exceptions consist of tax exploiters, that is, those in governments or among the latter’s clienteles who live off other people’s taxes—who, after all the churning of government services and subsidies, are net tax consumers instead of net taxpayers.
The proposed new system would prevent tax competition by imposing a common minimum corporate tax rate, which amounts to creating an international tax cartel. A cartel acts like a monopoly by charging the maximum that the market will pay. Modeling the tax Leviathan as a monopolistic revenue maximizer has an honorable tradition in public-choice theory: see the 1980 book of Geoffrey Brennan and James Buchanan, The Power to Tax.
The sum total of the taxes collected by the cartel members would be higher than currently, which is precisely why some governments want a cartel. The Irish government, for example, would not be able to continue poaching foreign companies with a lower tax rate than the minimum. It would thus lose money and some sort of explicit or implicit compensation, in money or in kind, or else some threat, may be necessary to persuade it to join the cartel. Most taxpayers in the cartel would be worse off.
Note that this tax cartel is not a new idea related to the Covid-19 pandemic. It has been brewing for about a decade, notably at the OECD. Leviathan was hungry before the pandemic, during the pandemic, and he is still hungry. It was hungry before digitization (which made tax competition easier) and still is. Of course, the state is greedy because government actors like politicians, bureaucrats, and individuals in favored clientèles are greedy.
In this attempt to blunt tax competition, state greed is pretty obvious even if it remains opaque to the rationally ignorant taxpayer. For the typical taxpayer, the cost of gathering and understanding related information is not worth the benefit because of his infinitesimal influence on tax policy and the low or unknown effect of corporate taxes on his own revenue. But the net benefit is obvious for the statocrats:
Treasury Secretary Janet L. Yellen and other administration officials have said that getting other countries to go along with a base tax rate on overseas profits would minimize any disadvantage to American companies and make them less likely to move their operations to countries with lower taxes. …
“That global minimum tax would end the race to the bottom in corporate taxation…” she said in a statement. (Alan Rappeport, “Finance Leaders Reach Global Tax Deal Aimed at Ending Profit Shifting,” New York Times, June 5, 2021)
Tax competition pushing national states to levy lower taxes is apparently a “race to the bottom.” Like when your private suppliers compete to offer you a lower price? Ms. Yellen would have been closer to the truth by paraphrasing Willie Sutton: Why do you tax corporations? Because that’s where the money is. Moreover, who actually pay corporate income taxes—employees in lower wages, consumers in higher prices, or shareholders in lower returns, including household pension funds which hold perhaps 30% of American stocks—is opaque and largely unknowable. No taxpayer is easier to pluck than one who is invisible and unaware that he is being plucked. What is sure is that the estimated half-trillion dollars that the U.S. government expects to raise that way over the next decade will come from individuals, mostly Americans, who will have real resources grabbed away from them.
The losers in the new scheme would thus be the consumers and the net taxpayers. The losers would lose more than the winners gain because of the so-called “deadweight loss” of taxes, that is, the reduction in production caused by tax disincentives. Cartelized political greed not only transfers money from taxpayers to governments but it also misallocates resources in the process. The scheme would also increase the power and danger of governments.