Rich nations benefit, but poor suffer from tax scheme
As the Organization for Economic Co-operation and Development (OECD) works to reach a consensus on establishing a global minimum corporate tax rate, the administration is making its voice heard. Last month, the U.S. shook up global tax negotiations by proposing a hefty rate of 21 percent, a figure which is significantly higher than the 12.5 percent rate previously discussed at the OECD.
An agreement would allow OECD member nations to tax corporations headquartered within their borders the difference between the agreed upon minimum rate and the rate paid on profits made internationally. That new tax scheme is devised to equalize tax rates across the globe, but results in benefiting richer nations at the expense of developing economies.
While a global minimum tax rate this high would dissuade corporations from using tax havens to avoid hefty costs in some countries, setting the rate at this high level would also prevent smaller, developing nations from attracting corporate investments to their borders. Foreign direct investment is an integral part of development plans for lower-income countries, and efforts to disincentivize corporations from setting up operations in these nations would cause a reduction in the overall welfare of lower-income countries. The administration should avoid this proposal and spare these developing nations the economic harm resulting from this tax.
Countries at all stages of economic development are having a large amount of success by attracting corporations with lower tax rates. Ireland, for example, currently boasts a corporate tax rate of 12.5 percent, received $78 billion in investments from foreign multinationals in 2019. Other nations in the Caribbean such as the Dominican Republic, which boasts 74 free trade zones that feature 100 percent exemptions from nearly all of its national and local taxes, also get billions in investment annually from foreign sources.
Foreign investment in these countries is essential for building out domestic industry, creating jobs, and benefiting consumers. Currently, Ireland hosts around 1,600 foreign companies that directly employ over 250,000 people in sectors such as life sciences, financial services, and engineering. Additionally, for every 10 jobs created from foreign investment in Ireland, eight more jobs are generated in the wider economy. As a developing country, the Dominican Republic similarly relies on investments from overseas to build out its telecommunications industry and support its tourism, which contributes around 442,000 total jobs to the economy.
The buildout of industry as a direct result of foreign investment has improved overall consumer welfare in these nations. According to the OECD, Ireland which decades ago had the worst living standards among European countries, now ranks in the top 10 in net national income. The Irish government also estimates that 20 percent of its entire private sector is directly or indirectly attributable to foreign investment. In short, tax incentives attract capital and create jobs, which drives economic prosperity.
The Dominican Republic is an example of a developing nation that uses low corporate taxes to improve its economic prosperity. With more than one-third of its population below the poverty line, foreign investment is beginning to allow the economy to transform from a nation once dependent on the sale of commodity exports like sugar to one that is more diversified and experienced in manufacturing. As a result, the gross national income of Dominicans has increased by over $11,000 per capita since 2000.
The establishment of a global minimum tax rate would make it nearly impossible for lower tax nations to continue to attract investment from multinational companies. A review from the OECD concluded that, on average, foreign direct investment is reduced by 3.7 percent for each percentage point increase in the corporate tax rate. In short, as tax rates increase, the incentive for foreign companies to invest decreases tremendously.
Foreign investments are critical to the development plans of many nations. Countries like the Czech Republic and Hungary, for example, both have around 25 percent of private-sector jobs that are made available through foreign investment. Strategically important are the many former communist nations in Eastern Europe that use low corporate tax rates to attract investment and improve economic stability.
Enforcing a global minimum corporate rate would increase the cost of operation for multinationals, eliminate many of the known jobs in these lower-cost countries, and add to economic stability abroad. The Irish Finance Minister and President of the Eurogroup Paschal Donohoe estimated the country would lose 20 percent of its tax revenues from the departure of many foreign companies. A similar fate would befall developing nations like Mauritius, Paraguay, Uzbekistan, Kosovo and elsewhere, while providing cover for higher spending and higher cost nations like France and the U.S.
The end result from this international tax would therefore be an enormous decrease to economic growth and lost consumer welfare, most notably in today’s low tax nations. The proposed global corporate tax scheme would simply cripple developing nations, as poorer nations get poorer and the richer nations get richer.
Derek Hosford and Steve Pociask are with the American Consumer Institute, a nonprofit educational and research organization. For more information about the institute visit www.TheAmericanConsumer.org or follow us on Twitter @ConsumerPal.