The irony of the global corporate tax cartel

The irony of the global corporate tax cartel

Governments say cartels are economically harmful and even morally wrong.  So why are they establishing one of the largest cartels ever created?

The headline: "G20 leaders endorse global minimum corporate tax deal for 2023 start" (Reuters).  And it's not just the G20, there are reportedly 140 countries signing on.  They are agreeing to a minimum corporate tax rate of 15%.  This is what economists call price-fixing.  It is the classic behavior of a cartel.  And governments generally say cartels are bad.

A cartel is a group of independent market participants who collude with each other in order to improve their profits and dominate the market. Cartels are usually associations in the same sphere of business, and thus an alliance of rivals. Most jurisdictions consider it anti-competitive behavior and have outlawed such practices. Cartel behavior includes price fixing..." (Wikipedia).

You might say, "but governments aren't businesses!"  And you're right, they aren't exactly.  But they're not too different.  They are entities organized to compete against each other in a marketplace, so business theory largely holds true.  In some sense, a government is a business with a price called a "tax rate".  Like a business, one of its most effective strategies for poaching customers from competitors is with a lower price.  But if all the competitors agree on a nice healthy price for themselves, they win.  And who loses?  Customers.  That is to say, citizens and the companies they have built.

This 15% minimum corporate tax rate is ironic for a few reasons:

  1. The United States led the effort to establish this global tax cartel.  The Guardian called it the "Biden proposal".  That's ironic because the United States has historically been a global leader in prohibiting cartels: "After 1945, American-promoted market liberalism led to a worldwide cartel ban, where cartels continue to be obstructed in an increasing number of countries and circumstances."  According to the US government: "A plain agreement among competitors to fix prices is almost always illegal, whether prices are fixed at a minimum, maximum, or within some range."  Apparently the US government doesn't feel obliged to play by its own rules.
  2. The United States has recently had the highest corporate tax rate in the world.  In other words, it had the least competitive price in the world.  It's ironic that other governments would agree to make their prices less competitive at all, much less at the suggestion of the least competitive government.  In fact, the Biden administration originally proposed a 21% minimum and other countries negotiated down to 15% to preserve a wider margin of competitive advantage!
  3. Ordinarily with a cartel, "participating firms need to ensure that their collective secret is maintained" so they aren't sanctioned by government.  But there is nobody to sanction these governments, so they don't bother trying to hide what they're doing.

Should there be a level playing field in the world of business?  Absolutely.  Is a government cartel the right way to achieve that?  Nope, unless you stand to benefit from the cartel.  The world knows honest competition is the best type of playing field.  We should ask governments to compete for our corporate activity, while holding them accountable to principles of human safety, environmental health, and basic fairness.  Those principles are what governments should be agreeing on minimum standards for.  Instead of doing that hard work, they're going after easy money.  Classic government.

Thankfully, some governments have refused the 15% minimum corporate tax, most notably Ireland.  That means people still have some alternatives if they want them.  Further, even if there weren't hold-outs, we would still have hope for this international government cartel to disintegrate over time.  "In general, cartel agreements are economically unstable in that there is an incentive for members to cheat by selling at below the cartel's agreed price" (Wikipedia).  In other words, these governments are incentivized to create tax loopholes.  So we can expect tax codes to continue getting more complex globally, but at least with the benefit of lower rates.

P.S. Tax loopholes are insidious and destructive from the perspectives of both economics and politics.  Theoretically, the most business-competitive government in the world would have a relatively low tax rate and relatively few loopholes.  Again, honest competition is the best policy.