About That Tax ‘Race to the Bottom’

Democrats try to sell Biden’s plan with a tax-competition myth

WSJ editorial. Excerpts:

"Governments around the world have certainly reduced their headline corporate-tax rates since the 1980s. The average statutory corporate tax rate among 177 countries has fallen to 26% in 2020 from 46.5% in 1980, according to the Tax Foundation. Some jurisdictions boast very low rates, such as Ireland’s 12.5% or Hong Kong’s 16.5%. But if this is a race to the bottom, most national capitals are conspicuously ambivalent about winning. Global corporate rates have never converged at the floor set by the biggest tax cutters.

Instead, the name of the game has been tax reform. Competitive innovation in the mechanics of national tax codes—such as credits and deductions for physical investment, or treatment of research and development costs and intellectual property—is the true race.

To cite one example, the United Kingdom in its new budget proposes to increase the headline corporate rate but to partially offset that with a tax credit for investment in physical plant. It’s a flawed plan, but the goal is to lift investment to boost the post-Covid-19 recovery.

This type of tax competition was central to the 2017 Trump tax reform, not that Ms. Yellen or other architects of the Biden proposal want to admit it. They focus on the reduction in the federal top marginal corporate tax rate to 21% from 35%, while ignoring provisions that broadened the tax base.

Among the most important were new methods for taxing global corporate earnings arising from intellectual property; we described some of these provisions earlier this week. Democrats say the 13.125% effective rate the 2017 law imposed on these earnings is too low. But before that reform the true rate was zero as companies delayed repatriating overseas earnings to avoid paying any U.S. tax. Companies brought back some $1.6 trillion in capital in the three years after reform.

The 2017 Tax Cuts and Jobs Act finally reformed America’s corporate tax code after most other developed countries had taken steps to reform theirs and U.S. companies were at a disadvantage. The 2017 law, which left the statutory rate higher than competitors such as the U.K., is another example of how smart policy makers aren’t racing toward a zero rate so much as experimenting with the mix of rates and tax rules to foster healthier economies."

"Boosters focus on the OECD program’s minimum rate, which would probably be around 12%. If a company paid less than that share of its total taxable profits in the countries where it does business, its home country would impose a tax to cover the difference. The Biden tax plan would hit companies with an effective tax rate closer to 26% on global profits. Ms. Yellen is thus counting on a global minimum tax to block U.S. companies from returning to the pre-2017 norm of keeping capital overseas.

Additional mischief is in the other 249 pages of the OECD draft. A web of technical provisions seeks to eliminate the tax competition that matters by effectively harmonizing the rules for credits, deductions, exemptions and the like. The aim is to insulate governments such as France and Germany that find pro-growth tax reforms to be politically difficult, while making it harder for the Irelands of the world to compete with tax policy."