According to Treasury Secretary Janet Yellen,
it is important to work with other countries to end the pressures of tax competition and corporate tax base erosion… to make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations.
With all due respect, the Treasury Secretary’s logic is fundamentally flawed.
The level playing field concept is often grounded in the concept of “fairness” because corporations are able to earn billions of dollars in profits thanks to the secure political environments created by governments. This is true, of course. It is equally true that a stable government requires a sound economy to promote widespread prosperity, as many failed states across the globe vividly demonstrate.
Put differently, the economic growth created by innovative companies is just as fundamental to a successful society as is the secure political environment created by the government. Given this necessary balance between the private and the government sectors, Secretary Yellen could equally argue that,
It is important to work with other countries to end the pressures of excessive taxation and corporate profit erosion… to make sure the global economy thrives.
The idea that corporations pay taxes is also economically flawed. Certainly, companies will write the proverbial check to the country that imposes a corporate tax. But the entity that writes the tax check is not necessarily the entity that pays the actual cost.
In the case of a global minimum tax, the costs from a higher tax will be will paid by people. In this case, it is workers who will cover a large share of the costs through lower wages. Stockholders will also pay through lower dividends or capital gains.
According to Stephen Entin of the Tax Foundation, the studies that have attempted to measure who bears the burden from corporate taxes found “that labor bears between 50 percent and 100 percent of the burden of the corporate income tax, with 70 percent or higher the most likely outcome.”
Since labor likely bears 70 percent of the burden from any corporate tax increase through lower wages, from a practical perspective, raising the corporate income tax violates President Biden’s promise to not raise taxes on anyone making less than $400,000 annually.
Just as important, the tax competition that Secretary Yellen abhors is actually providing governments important information regarding the anti-growth biases created by their current tax systems. Instead of punishing the messenger, the Treasury Secretary would better serve the country by asking a different question: How can the Biden Administration establish a tax system that raises sufficient revenues to fund value-added government programs while imposing the least amount of distortions on the private sector economy?
Focusing the tax debate on this question would lead to a more efficient government sector and a more innovative private sector. Most importantly, such a tax system would promote broad-based prosperity that would sustainably raise the incomes for people of all income levels.
Dr. Wayne Winegarden is a senior fellow in business and economics at the Pacific Research Institute and the director of PRI’s Center for Medical Economics and Innovation.
