🌐 Is the global minimum tax a good idea?

In a nutshell: The economics of taxing multinationals

Downton Zurich near central station: 132 countries agreed that multinational corporations will have to pay an appropriate share of tax wherever they operate. Switzerland is among these countries. (I took this photo on 3 July 2021)

The agreement was called unanimously groundbreaking when - on 1 July 2021 - the Organisation for Economic Co-operation and Development (OECD) had announced that more than 130 countries (here is the list of all countries) plan "to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate." 

The principle of the agreement is that multinationals would have to pay a minimum tax rate of at least 15% on profits in each country they operate.

There is an economic necessity behind this agreement that is: capital is mobile. If there were solely national tax legislations around the globe, capital and corporations could avoid taxation successfully. 

Capital is looking for the country with the lowest taxes, subsequently the tax burden remains on everything that is more or less immobile (real estate, local firms, labour). The struggle for capital can lead to a race to the bottom regarding tax rates. 

That's exactly how it has been. Corporate tax rates have continuously declined over the last 40 years. "The weighted average statutory corporate income tax rate has declined from 46.52 per cent in 1980 to 25.85 per cent in 2020, representing a 44 per cent reduction over the 40 years surveyed," Elke Asen, Policy Analyst at Tax Foundation, wrote here

So a global minimum tax rate regime could stop this race to the bottom at 15 per cent. But the question is, will it really stop, and who will benefit from a global minimum tax rate?

I start with the latter. The rich countries easily agreed to the global minimum tax. Most of them even advocated for a higher minimum tax. Why? They fear tax competition. Their tax rates are often high. They gain relative competitiveness if poor countries have to raise their tax rates.

So will this tax be carried on the backs of the poor countries? No, the International Monetary Fund (IMF) says. The developing countries can also benefit from a global minimum tax rate, the organisation consisting of 190 countries is convinced. The reason is, the IMF argues, that these countries often have weak tax administrations, which lead to major challenges in effectively taxing multinationals. The goal of the minimum taxation is "to prevent erosion of the tax base from the excessive use of what is known as 'tax preferences'," Aqib Aslam and Maria Coelho from the IMW wrote in a blog post. And: "These tax preferences take the form of credits, deductions, special exemptions, and allowances and usually result in a reduction in the amount of tax a corporation owes. By instituting a corporate minimum tax rate, governments guarantee a floor on the businesses' contribution to the public purse."

In the paper "A Firm Lower Bound: Characteristics and Impact of Corporate Minimum Taxation", Aslam and Coelho show that tax revenues increased where domestic minimum tax regimes were implemented. Aslam and Coelho: "What we find is that introducing a minimum tax is associated with an increase in the average effective tax rate—that is, the tax rate actually paid by corporations after taking into account tax breaks—of just over 1.5 percentage points with respect to turnover and around 10 percentage points with respect to profits."  

So it looks like the developed high tax countries could benefit from a global minimum tax rate as well as developing low tax countries. The minimum rate of 15% "is estimated to generate around USD 150 billion in additional global tax revenues annually," the OECD has calculated

Then nothing stands in the way of an introduction. Well... First, the agreement has to be implemented in national law - 132 times. That is a long way to go. Second, low-tax countries will always have the incentive to deviate from the agreement to attract capital. For instance, Estonia and Ireland are not on the 132-countries-list.    

Final remark: Economists love to determine optima. Could there be an optimal global minimum tax rate? Maybe. I haven't found anything about it. In general, there is extensive literature about optimal tax theory. This theory is usually about finding a tax that maximises a social welfare function subject to economic constraints. I recommend "Optimal Taxation in Theory and Practice" by N. Gregory Mankiw, Matthew Weinzierl, and Danny Yagan. That paper gives a good overview. Anyway, dealing with the topic of what is the best tax system is centuries old. In "The Wealth of Nations", Adam Smith, the founder of economics, wrote: "Good taxes meet four major criteria. They are (1) proportionate to incomes or abilities to pay (2) certain rather than arbitrary (3) payable at times and in ways convenient to the taxpayers and (4) cheap to administer and collect."