Speaking on Monday prior to her engagement with the International Monetary Fund, Treasury Secretary Janet Yellen called for the G-20 countries to form what amounts to a tax cartel. It would set a minimum corporate tax rate, limiting competition among countries when business leaders search for lower-cost locations.
Not unlike OPEC, whose members seek to impose higher-cost crude oil on consumers worldwide, the Yellen-proposed cartel, which I suggest calling the OCTC, or the Organization of Corporate Taxing Countries, would make it easier for the Biden administration to raise the corporate tax rate from the current 21% to 28% and limit what Yellen referred to as “a race to the bottom.”
Wouldn’t it be wonderful if corporate and other taxes could be driven lower by competition and efficiency instead of higher by mismanagement and collusion?
In most other settings, cartels and collusion get little respect. After all, concerns about these things leading to monopoly pricing and restricted output gave us the Sherman Antitrust Act and other monopoly-limiting laws. We also have a Federal Trade Commission and Antitrust Division of the Department of Justice to prosecute vigorously businesses and people who collude to improve their own well-being by imposing harm on consumers. If governments played by the same rules as the private sector, one could imagine the FTC and DOJ taking an interest in a Yellen-coordinated OCTC.
Instead of urging international collusion to make the world a more costly place to produce goods and services, wouldn’t it have been wonderful if Yellen had called on developed nations to find ways to reduce the cost of government for their citizens and the businesses who hire and pay them? Surely Switzerland, a much-respected country with a corporate tax rate of 8.5%, would have some productive tips. Hungary, a small economy that taxes at the rate of 9%, and Ireland, at 12.5%, might have some ideas, too.
Corporate tax rates vary widely, but a 2020 Tax Foundation study found that the average rate across 177 countries was 23.85%. European countries, many of which are known for their social democracies and generous entitlements, have an average rate of 19.9%. Recall that the United States’s rate is currently 21%.
Here at home, U.S. efforts to hammer down the cost of operating federal agencies and their regulations tell us that huge savings can be achieved. For example, the Office of Management and Budget’s Office of Information and Regulatory Affairs projected that 2020 cost savings from recent regulatory reforms were $51 billion, and that is for one year. This doesn’t directly free up revenue for the Treasury Department to use, but it does lighten the government’s load. In my years as FTC executive director, we learned that the relatively small agency could reduce costs by contracting out guard, food, and library services to private firms. Similar discoveries were made by a governmentwide, OMB-driven effort.
Oh, and we also learned to turn off the air conditioning after 6 p.m. in the summer after we began to receive power bills each month for our government-owned buildings, which was another positive government action.
There’s another point here. Not everyone is quick to acknowledge that only people pay taxes, but it’s nonetheless the case.
When it comes to corporate income taxes, corporations are really collectors, redirecting a burden that falls on their employees, owners of stock, and customers. Will some rich executives and wealthy shareholders pay a large chunk? Maybe, but their spending and future investments help maintain a vibrant economy. And while it may be politically popular to talk about statutory tax rates and make a moral argument about corporations paying their fair share, what really matters are taxes net of allowable deductions. Higher tax rates are frequently offset with deductions. But that’s a horse of a different color, and it’s a far more complicated one. Perhaps it’s just more effective for high-ranking officials to speak in terms of easy-to-grasp statutory tax rates.
President Joe Biden is looking for big bucks to fund his infrastructure program. Wouldn’t it make sense to make government more efficient and more effective before forming one more cartel — this one government-approved — to make life more costly?
Bruce Yandle is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a distinguished adjunct fellow with the Mercatus Center at George Mason University and a dean emeritus of the Clemson University College of Business and Behavioral Science. He developed the “Bootleggers and Baptists” political model.
