The corporate tax has always been a Rube Goldberg machine, trying to accomplish some simple tasks through unnecessarily complex machinations. So, it’s fitting, in a perverse way, that the Biden administration would try to jury-rig a patch for this complex machine.
That patch is called a “global minimum tax,” and President Joe Biden and Treasury Secretary Janet Yellen have gotten most of the world’s governments to sign up for it. A global minimum tax surely will not work, but it’s valuable nonetheless as a demonstration of the problems with a corporate income tax.
Taxing corporations is good politics for the same reason it’s imperfect policy: It’s hard to tell who really pays the tax. It seems to the average voter that nameless, faceless profitable corporations are paying the tax. But corporations are not people. Corporations do not consume. They never really have money. They simply hold money.
So, when a corporation “pays taxes,” it is really collecting and remitting taxes. Every dollar that flows into federal coffers through the federal corporate income tax is a dollar taken away from some humans. (This is what Mitt Romney probably meant in 2012 when he said, “Corporations are people.” They are made up of people.)
We don’t know what would happen if you totally scrapped the corporate income tax. The corporations would probably pay higher wages. They would probably charge lower prices. Shareholders would probably get higher returns in terms of share prices and dividends. Notably, those shareholders and wage-earners pay taxes on their investment and labor income, which is diminished by the corporate income tax.
Economists have long argued over the incidence of the tax — who pays how much of the corporate income tax — and the correct answer is, “It depends.” What’s not up for debate is that the corporate income tax is a small portion of tax revenues. They generate about 7% of federal revenue, according to the Tax Foundation, and only about 3.9% of all government revenue when we include all state and local taxes along with federal taxes.
Economists also agree on another aspect of the corporate tax: Companies flock to countries that have lower corporate rates.
When Congress and President Donald Trump cut the federal corporate income tax from 35% to 21% in the Tax Cuts and Jobs Act, that helped the U.S. economy for many reasons, including lowering the incentive for companies to flee for lower-tax jurisdictions such as Ireland and Hungary.
But Biden wants to hike the corporate tax rate. Democrats love higher tax rates because higher rates make loopholes and tax breaks more valuable, thus giving lawmakers more power to control businessmen’s decisions and court their donations and hiring gigs.
Yet, hiking the corporate tax rate (ours is already higher than that of the United Kingdom, Poland, Iceland, Switzerland, Norway, Israel, Spain, and a dozen other countries) will make more corporations set up shop in other countries. So, Yellen and Biden are trying to minimize tax competition. The first step is to set a global minimum of 15%, which would make Ireland and Hungary into scofflaws.
This would be mostly a symbolic act. Neither Biden nor Angela Merkel nor Emmanuel Macron plan on giving up their industrial policy, including tax breaks for favored activities, handouts to favored corporations, and byzantine definitions of “profit.” Biden, to his credit, has negotiated with European leaders to dial back aircraft subsidies, but his environmental and economic agenda involves constant picking of winners and losers.
So, taxing corporations isn’t “sticking it to big business.” Biden plans to keep currying their favor and subsidizing it. Hiking taxes on corporations involves disguising where the tax dollars are coming from and giving Washington more power. Biden’s attempt at a global minimum is an effort to make this crooked game less costly.
