Ireland’s announcement this week that it is opposed to the Biden administration’s arguments for a global minimal corporate tax is good news. Whereas G7 countries have endorsed the idea, the intransigence of the Emerald Isle is encouraging. (Apparently, President Biden’s vocal support for the Irish over Brexit Britain amounted to “small potatoes.”) Other low-tax countries may push back, too. Sadly, Brexit Britain is undecided and will face pressure to bow to America next month at a G7 meeting at Cornwall.
Irish finance minister Paschal Donohoe threw cold water on the plan in an interview with British broadcaster Sky News. “We absolutely want to engage with President Biden and his team,” Donohoe said, “but we do have really significant reservations regarding a global minimum effective tax rate that is at such a level that it means only certain countries and certain size economies can benefit from that rate.”
Established firms have used similar tactics domestically to frustrate small competitors. By “capturing” regulatory policy, large corporations can more easily absorb the costs of government burdens — tax rates and legal compliance — that smother the profits smaller entities can eke out. No wonder the industrial might of the G7 is eager to ward off competition from smaller countries. (With their corporate tax rates at 15 percent — Canada and Germany — or above, G7 countries have nothing to lose. EU member Hungary, however, has a corporate rate of 9 percent and would take a hit along with Ireland.)
Mr. Donohoe acknowledged Ireland’s global competitive advantage of a 12.5 percent corporate tax. “I’m proud of the part that it has played in our economic development, that for a country of our scale and size, that we were able to grow our economy … for many decades,” the finance minister boasted. Such a tax incentive “is now only part of the competitive offering for an economy like Ireland’s.”
While economies like those in the United States can “afford” to be expansive, its current rate of 21 percent is poised to rise to 28 percent. The White House initially wanted its present rate to set the international “floor.” But, in a step to sweeten compliance, it lowered its suggested rate to 15 percent — in anticipation that once the idea of a global corporate tax regime is accepted, rates can move upwards. Germany, France, Canada, Italy, and Japan have expressed openness to the Biden plan.
With its corporate tax rate set to increase and faced with enormous deficits, the Democrat administration is anxious to stop corporations from moving profits to more amenable tax jurisdictions. Instead, it wants taxes to be levied where profits were earned. Plus, by setting a minimum rate, the plan is to remove “mobility” incentives for firms to relocate to tax havens.
For free-market economists, such a global agreement on corporate tax policy is worrisome. The competitive nature of international tax rates acts as a check on domestic policy. Governments are hesitant to raise corporate taxes if companies are able to set up shop in countries with more business-conscious attitudes.
Corporate tax rates are in themselves inimical to good business practice. When goods and services are taxed already, this amounts to a form of “double” taxation. Corporations will either raise their prices to cover additional costs or, to remain competitive, will absorb the hit, which impacts their bottom line. Capital accumulation and employment opportunities suffer as a result.
The question now is whether or not other countries will follow Ireland’s example. In the United Kingdom, the Conservative government is under pressure from its Labour finance critic Rachel Reeves to buy into Biden’s corporate tax plan. By imposing a global barrier to tax avoidance, she argues, “we can level the playing field for our brilliant businesses and build an economic recovery with thriving industries, strong public services and good, secure jobs for all.”
Opponents of the tax grab do not share Reeves’ optimism, however. Chancellor of the Exchequer Rishi Sunak announced in his March budget that Britain would raise its rates to 25 percent from its current 19 percent by 2023, already conceding the principle that corporate tax rates are acceptable sources of revenue.
Sunak is hesitant, however. The huge amounts of debt acquired by the government in its “COVID strategy” make low rates necessary now in order to encourage business growth. That’s a sound argument that should successfully vitiate any claims that such corporate tax rises down the road are either warranted or beneficial. Nor should any government rely on “projected” increases to tax revenue. States invariably kill the golden corporate geese in their greed to fund their largesse.
When the United Kingdom restored its independence from the European Union, Brexiteers cheered that it would regain the freedom to set its own tax policies in order to become globally competitive. Now it seems that the Conservative government is less adverse to abiding by global restrictions on its competitive advantage. Ireland is willing to buck the trend. Dare one hope that the lesson of Brexit has crossed the Irish Sea? Is an “Irexit” next in the cards?
Stephen MacLean, a freelancer based in Nova Scotia, writes the Brexit Diary for the New York Sun.
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