The Organization for Economic Cooperation and Development announced earlier this month that it intends to introduce a minimum global tax rate of at least 15% for companies. It warmed my heart to see my ancestral homeland emerge as one of the few nations to oppose this announcement.
Ireland wasn’t the largest country to protest the OECD move – Nigeria’s 200 million people dwarf its five million. Nor was it the only member of the European Union that did this – Hungary and Estonia did too. But given Ireland’s oversized voice in international diplomacy and its cultural ties to the US, it is clear that talks about the global minimum tax rate will have a distinctly Celtic flavor. The Biden administration should pay close attention.
The premise behind the global minimum corporate tax is simple: Most governments around the world want to raise money. But they don’t like taxing the middle class as it leads to losing elections and there aren’t enough rich people to raise the necessary funds. That means governments have started to view companies as piggy banks that can rob them. The Microsofts and Apples of the world don’t get much public sympathy when it comes to paying their “fair share”.
In the not too distant past, the US knew better. We knew that low corporate tax rates boosted investment, productivity, jobs and wages – all of which fueled a prosperous economy. When the US lowered the Ronald Reagan corporate tax rate to 35% – which gave us the lowest interest rate in the world – we reaped tremendous benefits at the expense of other countries with higher rates. But these countries have also learned from our example. They even started beating us at our own game, causing US businesses to migrate to cheaper taxing countries, including Ireland. When we lowered tax rates under President Trump, the US corporate tax rate was the third highest in the world at 35%.
The Biden government wants to increase the corporate tax rate from 21% to 28%. However, she is concerned that other countries will see the competitive advantage if they cut their own tariffs. Other major economies are in the same boat.
Hence the Irish “problem”. The small nation has taken the American lesson to heart and led a corporate tax rate of 12.5% to an economic boom that makes many other European countries green with envy. After proving the value of lower interest rates, Ireland turned against an attempt by the International Monetary Fund to push through a tax hike as part of a bailout during the financial crisis. The Irish even defended Apple, one of their biggest corporate citizens, against EU efforts to invalidate these low interest rates in court. No wonder the Irish stand firm again.
The Irish know what should be clear to everyone: their OECD partners cannot raise their corporate taxes unless the low-tax Ireland agrees to forego one of its greatest competitive advantages in the world market.
Why should Americans be careful? Because even before President Biden announced plans to increase the corporate tax rate, the US rate had already exceeded Ireland’s. We would probably benefit from a global tax floor of 15%. That is, until the same anti-competitive mentality that is trying to destroy Ireland turns inward. And it definitely will be.
Listen to Treasury Secretary Janet Yellen’s rhetoric at Group of 7 meetings last month: “This global minimum tax would end the race to the bottom in corporate taxation and ensure fairness for the middle class and working population. . . . [It] would also help the world economy thrive by creating a level playing field for businesses and encouraging countries to compete on a positive basis, such as:
Now read this passage again and change the words “global” to “domestic” and “countries” to “states” and you can practically hear the voices of Alexandria Ocasio-Cortez, Maxine Waters, and Bernie Sanders.
Nine US states have no income tax. New York, New Jersey and California can’t stand this. They could lower their tax rates and find out how to raise their children, build roads and bridges, and attract people with less government revenues. But that would be difficult. Politicians don’t like doing hard things. It is much easier to declare the whole system “unfair” and find a way to end it completely. If the OECD is successful, it will have a strong precedent to rely on.
The competition between nations or states on tax rates is just that: competition. And if you lose a competition, you have two options for reacting to it. One is getting better. The other is to prevent competition. America believed in the former; Ireland still does. The East Germans were famous proponents of the latter.
Ireland is at the forefront of this battle today. Should it lose, the battle will soon come to our shores.
Mr. Mulvaney was Director of the Office of Management and Budget (2017-20) and U.S. Special Envoy for Northern Ireland (2020-21).
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