Janet Yellen’s corporate minimum tax plan won’t work. Why? Just look at OPEC

So what better way to prevent the U.S. from falling behind than to create an OPEC-like tax cartel to put a halt to tax competition, what Yellen calls a “race to the bottom”?

Cartels operate to benefit producers at the expense of consumers. Yellen says the global minimum tax is needed to support “stable” tax revenues for governments, dismissing the economic consequences. Cartels also seek to quash smaller players in the market who are nimble and more efficient and, thus, can undercut the prices of the dominant players. In the tax world, that means small export-oriented countries like Estonia, Ireland, and Sweden.

Experience tells us that cartels never last because there is too much incentive to cheat and the alliances are very fragile. Last year’s spat between OPEC-led Saudi Arabia and Russia is proof of that. Saudi Arabia wanted to cut oil production to boost prices during the pandemic, but Russia wanted to keep the spigots on. Saudi Arabia decided to teach Russia a lesson and turned the spigots on high, driving global prices down 50%.

It is not hard to imagine a similar dispute within a global tax cartel, because we’ve seen it in trade. China, for example, which currently levies a 25% corporate tax and frequently ignores World Trade Organization rules, could very well slash its corporate tax rate in a play to grab market share away from the U.S., now stranded with an uncompetitive tax system.  

As concerning is Yellen’s desire to put government demands for more tax revenues over the capital needs of a fragile global economy. OECD economists have determined that the corporate income tax is the most harmful tax for economic growth—meaning raising corporate tax rates across the globe would impair capital flows, dampen foreign direct investment, and impact global supply chains—just at a time when the economy needs to recover. Putting the needs of government ahead of global living standards seems wrongheaded.   

Perhaps the worst aspect of Yellen’s plan is that a U.S.-led global minimum tax amounts to tax policy imperialism, trampling over the economic sovereignty of small export-oriented countries.

With small populations and few natural resources of their own, these countries employ low corporate tax systems to be globally competitive and attract investment. Ireland’s story is well-known. A nation of less than 5 million people, Ireland used a low 12.5% corporate tax rate to transform itself from Europe’s economic basket case into the Celtic Tiger.

At the far eastern edge of the European Union, tiny Estonia, with a population of 1.3 million, may have the best tax system in the world. Estonia has a corporate cash-flow tax that taxes profits at 20% only when they are distributed to shareholders. Its personal tax rate is also 20%, and there is no second layer of tax on dividends and capital gains. As a result, Estonia has become an e-commerce hub in Europe.

Sweden has shed its reputation as a high-tax socialist paradise and now has the seventh-most-competitive tax system in the OECD, according to the Tax Foundation’s International Tax Competitiveness Index. This year, Sweden further lowered its corporate tax rate to 20.6% from 22%, and now has a lower corporate rate than the U.S. As a result, companies based there, like Spotify, have thrived, making Sweden a hotbed of new-economy entrepreneurship.

The U.S. would do well to emulate these more competitive tax systems, yet Yellen’s global tax cartel seeks to undo all the economic gains that smaller countries like these have made over the past 20 years. In fact, the Biden tax plan shows the U.S. is intent on competing, but with direct subsidies rather than sound tax policies. This seems very myopic for an administration intent to rise above the overt nationalism of the previous one.

Scott A. Hodge is president of the Tax Foundation, a nonpartisan tax research organization.