The Group of Seven (G7), which consists of seven wealthy democracies including Canada, France, Germany, Italy, Japan, the UK, and the US, met over the weekend to consider a ‘global minimum corporate tax rate’. A new minimum rate of at least 15% was tentatively agreed on.
This deal attempts to discourage what U.S. Treasury Secretary Janet Yellen has called a “30-year race to the bottom on corporate tax rates” by countries competing to draw in multinational corporations.
Why Does G7 Want a Global Tax?
Large and powerful countries, such as the United States, want to discourage multinational corporations from moving their profits and tax revenues to low-tax countries. By instituting a mandatory minimum tax rate, the G7 is attempting to disincentivize this type of behavior.
Governments of countries across the globe would still be able to set a corporate tax rate to their liking, but if a company pays a lower rate in any particular country, their home governments could “top-up” their taxes the the minimum rate, thus negating the benefits of shifting profits to tax havens.
A Little Bit Like An Oligopoly?
In this particular situation where the G7 is wanting to mandate a global minimum tax rate, they seem to be behaving like a collusive oligopoly. An oligopoly, similar to a monopoly, is a market form where an industry is dominated by a small group of large firms. In this sense, the G7 countries can be seen as the large firms in this global market of corporate tax rates. Due to the fact that these G7 countries are seven of the most powerful economies in the world, they hold a lot of power in this market.
Normally, if these large firms are forced to compete with each other, oligopolies don’t always have to turn out bad for consumers (which in this case would be international corporations looking for the best tax rates). However, in this case it appears the G7 oligopoly is forming a collusive oligopoly, where the countries are coming into a formal agreement with one another to avoid competition among themselves.
On top of limiting competition among themselves, the G7 is attempting to do away with global competition in the corporate tax rate market altogether! Rather than allowing the market to drive taxes down further, forcing the G7 countries to compete with countries that provide lower corporate tax rates, the G7 countries are colluding to stifle their competition completely.
Pay Their Fair Share?
The G7 countries cite “making large corporations pay their fair share of taxes” as one of their main goals. But this goal seems extremely hypocritical from the viewpoint of a country that has been demanding a lower corporate tax rate to compete with larger and more economically developed countries in the G7 or G20.
The Irish economy has done very well in recent years due to the investments of billions of dollars from multinational businesses. Being a low-tax country, the Irish economy has benefited by providing a safe haven to businesses trying to escape higher tax countries like many of those in the G7. If this minimum tax rate were to be implemented globally, countries like Ireland would suffer tremendously as their advantage is ripped away from them by the colluding oligopoly that is the G7. That doesn’t quite seem “fair”.
All in all, the new minimum global tax rate seems to only serve one purpose, which is to limit competition in the global corporate tax rate market. This anti-competitive law will without a doubt increase taxes on international corporations, as it is intended to do. But don’t be fooled, the G7 countries are only looking out for their own budgets and tax revenue streams.