A global minimum corporate tax (GMCT) agreement is a pure cartel created by a comity of nations. To justify this wildly anti-competitive policy, the G7 invoked ‘fairness,’ a powerful principle. Indeed, neurologically, one of the leading causes of human stress is a perceived lack of fairness. Moreover, in experiments such as the ‘Ultimate Game***,’ it is demonstrated that individuals have a strong preference for fairness over material benefits.
Consider now the many objections to a GMCT:
First, developing countries with competitive disadvantages should be allowed to compensate for a poor business infrastructure by lowering their corporate tax rate to attract investments and climb the economic ladder;
Second, corporate taxes are nonsensical: since shareholders are already taxed, a corporate tax equates to double taxation, which does not rely on any moral ground. Thus, the only fair corporate tax rate is zero, which applies by extension to the GMCT;
Third, once in effect, the new cartel will not hesitate to use the GMCT to fund its fiscal expansion policies. If death and taxes have always been certain, now it is death and more taxes;
Fourth, it is a gift to China who will retain its tax sovereignty and sanity, and to Russia, who is watching the economic self-sabotage move with delight;
Fifth, exemptions and offsetting subsidies will chip away at the concept, which will end up being the product of a fairness-busting political process;
Finally, anyone who is not a ‘liberal intellectual’ and instead lives in the real world appreciates that a GMCT is too complicated to implement. Like the EU taxonomy, it is doomed. The apathetic reaction from the financial markets to the GMCT agreement at the G7 level says as much.
These arguments have some validity. A GMCT may have some harmful side effects from an economic, social, and geopolitical perspective. But the new scheme also represents an extraordinary case of altruistic cooperation where the preference for fairness at its most basic level – ‘pay your taxes’ – trumps even the most compelling competing objectives.
Besides, competition amongst nations will not go away with a GMCT. It only shifts the debate to more virtuous sources of national differentiation such as infrastructure, health, and education. The same principles apply to the minimum wages within an economy: by setting a minimum level, governments compel firms to invest in and drive higher productivity. Hey, what about a global minimum wage?
Governments (like firms) must compete on other factors than low taxes or low labor costs. And if fairness is demonstrably worth more than material benefits to citizens (and employees), determinedly promoting it represents an opportunity to build a form of wealth and a sustainable competitive advantage.
Political or corporate leadership teams looking for some encouragement ahead of this daunting task ought to listen to ‘Shy Away’ from Twenty-One Pilots’ brand new album ‘Scaled and Icy’ – an ode to the brave: Don’t you shy away/Manifest a ceiling when you shy away…
*** The ultimatum game involves two players, one of them receives a sum of money which he has to share with a second player. The first player, the “proposer,” can decide how much he offers the second player, called “responder,” who can either accept or reject the offer. If the responder rejects, neither of the players receives any money. Mathematically, the first intuition is to offer the opponent the smallest amount possible. However, during the game players routinely reject even high offers if they deem the split unfair [at the expense of not receiving any cash. [Source]