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The finance ministers of more than 130 nations and territories have made a preliminary decision approval create a tax floor– a proposed minimum corporate tax rate of 15 percent. His supporters, including unfortunately Canada, claim it would create an “equal playing field” and stop a “race to the bottom”.
Some countries face a tough choice: lower corporate taxes to retain and attract domestic and foreign investors, or lost revenue to be offset by increasing income and other taxes.
This preliminary agreement has other features including more precise and narrow definitions of intellectual property, digital commerce, transfer pricing, and the allocation or allocation of revenue, costs, profits or other flows by region or other criteria.
There is also the usual grumbling about “fair share”.
Several points undermine the case of these zealous government money makers.
The first is the 15 percent arbitrariness. Why 15 percent and not 10 or 20 percent? Presumably, the former number would be too low to please some and the latter too high by its current survey. Ultimately, it was a negotiated compromise and not demonstrably based on optimization studies.
The next problem is that this would put some countries with low corporate tax rates at a disadvantage. An important part of Ireland’s success – after a near financial death in 2008-10– the corporate tax rate is 12.5 percent. This is lower than most other nations, especially advanced ones rich. Ireland’s gross domestic product per capita is now higher than that of the United Kingdom, United States, Scandinavian Nations and Qatar. Only Luxembourg has a higher GDP and is also a low tax country.
Raising corporate tax rates would affect companies’ profitability, cash flow from operations, and resources available to reinvest and grow their businesses.
Employment growth and wages would suffer from reduced economic growth. Economic growth, which is lower than forecast, will affect government tax revenues from personal income taxes, excise taxes, property taxes, sales taxes, and value added taxes (VAT).
Governments would be tempted or forced to cut services or levy other taxes to make up for the shortfall in corporate taxes and other growth-sensitive taxes that would almost certainly be burdened by working citizens and reduce their standard of living.
The third problem is the belief that corporate tax revenues constitute a large and crucial part of total government revenues. It is not. Use of the Organization for Economic Co-operation and Development (OECD) data, the tax foundation found that corporation tax receipts averaged only 9.6 percent of total national income.
So if Ireland had that OECD average share of businesses and had to increase it by 20 percent – from 12.5 to 15 percent – it would gain a little less than two percent of that, at the expense of its economy and its people.
However, Ireland derives 14.4 percent of its total tax revenue from corporate income steer, almost five percent more than the OECD average. By keeping its rate low, it has actually increased its overall sales.
Sovereignty is one of the most important concerns. By entering into such a tax treaty, Canada and other nations would be bound by its terms and conditions and would not be able to lower taxes, except perhaps at the provincial, territorial, or local level.
When Canada finds itself in a recession, low growth stagnation, war, or similar emergency, it may want to suspend, drastically cut, or abolish corporate taxes.
Even sub-national regions such as provinces or states could lower their taxes or make them negative in order to attract companies, as is sometimes the case now.
There are ways to play the system. The draft treaty could prohibit or restrict this, but there could be other avenues as well. National governments could send large sums of money to provinces or states to keep their corporate taxes low. Corporate income tax could also be reshaped with much more generous capital cost grants, investment taxes, research and development, or employment and training credits.
There are other reasons not to believe the sincerity of the motives of the main proponents of this idea. The new US administration wants to raise corporate and income taxes to their enormous levels deficit. The US will do far less of this attractive to investors and companies that want to enter or expand in the US market.
It will also be less attractive to high-income or highly qualified professionals, entrepreneurs, financiers, inventors and technically or scientifically trained people.
Progressives always like to raise taxes and are less and less hospitable to business and free Markets.
This also gives cover to governments that are far too lazy, cautious, or scared to become more efficient, get rid of bad programs, sell unneeded assets, cut costs, and cut spending.
The excuse of the pandemic is thin. The economic recovery is in full swing. Gradually lowering taxes could well bring more benefits and higher revenues than increasing them for businesses.
Corporate tax is just one thing companies and investors look into before investing any money. You are also looking for:
- the strong rule of law;
- Company property and industrial rights;
- abundant, affordable and accessible energy sources;
- high quality infrastructure;
- smooth, fast import and export, regardless of tariff levels, including extensive and widespread trade agreements;
- high-quality, well-trained workforce and technical services;
- stable, understandable and adequate regulatory system;
- Security and security;
- relatively stable policy;
- open-minded and business-friendly government and society;
- simple, quick and relatively inexpensive approval and project approval processes.
Governments have enough problems meeting all of these requirements. Tax hikes for businesses and high income individuals will only make things worse.
Governments need to make better decisions and be open to what is affordable and what is not. The corporate tax hike may look good to some noisy people, but it will hurt everyone.
Ian Madsen is a Senior Policy Analyst at the Frontier Center for Public Policy.
Ian is a thought leader at Troy Media. For interview requests, click here.
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