Adam Smith’s warning of 1776 needs to be updated. He said: “People of the same trade rarely get together, even for mirth and entertainment, but the conversation ends with a conspiracy against the public, or a ploy to raise prices.” If you have an unromantic understanding of government, you know that it is not made up of selfless altruists but of people as interested in maximizing their power as private sector actors are interested in maximizing their profits. So beware when governments form cartels to expand their capture of society’s resources.
The United States and 131 other countries and jurisdictions recently agreed to impose a global tax on a few large (mostly American) companies. The deal would impose a minimum tax of 15% (the Biden administration wanted 21% and still plans to impose the highest rate on U.S. companies) on the foreign profits of multinational companies. It would also tax some of the profits of larger companies where their customers are rather than where their production is (factories, etc.).
Part of this proposal is a reallocation of taxing rights, in favor of some countries to the detriment of others. This should be of interest to the United States House of Representatives, where, according to the Constitution, “all bills aimed at increasing income must come from.”
A large majority of nations have an interest in compelling compliance with the few nations that have prospered by using low corporate tax rates to attract business. The Biden administration urgently wants to hamper corporate mobility because it offers to pay for some of its spending spree by raising corporate taxes. (While masking the fact that corporations don’t pay taxes, they collect them: corporate tax is paid by employees, shareholders, and customers of corporations.) The new global tax regime would discourage U.S. businesses to escape the increase proposed by the Biden administration. the corporate tax rate from 21% to 28%.
Secretary of the Treasury Janet Yellen, who knows how to provide the media with useful vocabulary, calls corporate mobility a “race to the bottom.” It is actually a race for rationality for Americans, who benefit internally from “entrepreneurial federalism”: states, understanding that capital goes where it is welcome and stays where it is well treated, compete (with right to work laws and other incentives) to create inviting business environments.
The Biden administration is committed to a familiar two-stage government: government creates conditions detrimental to a segment of society; then it prevents the segment from escaping the conditions. For example, governments cede control of public schools to politically powerful teachers’ unions who defend ideological agendas and work rules that benefit paying teachers rather than non-paying children. Second, to prevent parents from escaping the realm of union power, governments are limiting the number of charter schools, which are non-union public schools.
If implemented, the new tax system would redistribute a small fraction of the world’s gross domestic product to various nations. A consortium of European think tanks estimates that 78 current companies (about two thirds of which are American) would be affected. However, implementation is uncertain.
Three low-tax members of the European Union – Ireland, Estonia and Hungary – have so far been opposed. They are two more than enough to prevent the EU27 from adopting the minimum tax. The hesitations of China and India over the new regime can perhaps be eliminated by granting waivers to protect privileged industries, a process which, once initiated, will make the regime porous.
To accept the new global tax system, Congress, which intermittently gets involved in the governance of this nation’s executive branch, would have to amend not only some US laws but also some treaties, which would require two-thirds of the Senate. This assumes, perhaps recklessly, that a parliamentary maneuver will not be designed to further erode the rule of law by circumventing this constitutional requirement. The Paris climate “deal” and the nuclear “comprehensive joint action plan” with Iran should have been treaties, but were treated as minor things because the executive did not want to try to bring together the broad support that the Constitution demands for capital measures. For the United States, Congress’ adoption of the Biden administration’s global minimum tax rate by miniscule majorities as part of a ridiculously elastic “reconciliation” process would be most significant as unraveling further to the increasingly irregular rule of law in the country.
When Adam Smith warned in “The Wealth of Nations” against private sector cartels that contrive to raise prices, he could not imagine a cartel of 21st century governments conspiring to raise taxes. Transferring to governments, which are always hungry for revenue, resources that would otherwise be available for investment, today’s cartel is an attempt to diminish the wealth of nations.