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On April 5, Treasury Secretary Janet Yellin proposed that the world’s large economies should all agree that business taxes should not go below a certain level.
Otherwise, she said, the “30-year race to the bottom” would continue. Yellin also called for a consensus on how countries would divide up the right to tax companies that do business across many countries’ borders.
The Yellin initiative has a third component as well—to eliminate the more egregious tax haven schemes that adroit companies use to allocate profit from high tax jurisdictions to lower, or zero, tax havens.
The latter two goals are entirely worthy.
Dividing revenues across different tax jurisdictions is well known to state tax authorities within the United States. Since 1967, the Multistate Tax Commission has promoted reasonable accommodations between state taxing authorities. Multistate businesses earn income from activities in different states. That income can be divided up according to the number of sales, employees, or physical plant a company has in each state. States are hesitant to put all the weight on the number of employees or amount of physical plant a company has in a state, lest jobs in the state are discouraged.
However, if sales alone were used as the basis of dividing national revenue between several states, companies could impose costs on one jurisdiction (for schooling children of employees, for instance) and end up paying very little for it. So, states use different weighting schemes for these three factors. Over time, the Multistate Tax Commission has pushed states toward more coherence among the formulas used by the states.
Yellin is right to push for this to be done internationally as well. The more nations adhere to the same formula for weighing factors of employment, investment, and sales in allocating taxable corporate revenue, the less chance there is for opportunistic manipulation of tax laws by multinational companies. Yellin is also right to urge the elimination of absurdities whereby some international companies allocate revenues to places like Jersey, a tiny UK island off the coast of France, or Macao, a separate tax jurisdiction within China, or the Cayman Islands, based on a legal fiction of “corporate presence” there created by lawyers clever enough to move one step ahead of the bigger nations’ tax authorities.
It is Yellin’s first announced goal, however, that should give pause to champions of individual entrepreneurship, including healthy competition between governments.
There are some countries that are legitimate homes of operations by international corporations that have managed through frugality and efficiency to cover the cost that a business imposes on their roads, schools, electricity grids, utility systems, and the like, at a lower amount than other countries.
As a result, they are able to impose a lower tax on a company for doing business there than are other nations. Hungary imposes a 9% business tax. Ireland imposes a 12.5% business tax. The United Kingdom charges 19%. The average for European Union countries is 21.7%; the global average is 23.79%.
These are not tax havens for paper-only corporations; these are legitimate locales that have outcompeted their rivals and deserve to attract business away from them, just as lower-cost businesses outcompete those with higher-cost structures.
Yellin’s phrase, “race to the bottom,” reflects an implicit judgment that there is something wrong with charging less for government services. It’s the mindset of those who oppose non-union charter schools that cost less but (often) perform better, or outsourcing California state functions, like repair of freeways or managing prisons. It’s found in the Davis-Bacon Act, which forbids the federal government from saving taxpayers’ money by contracting with service providers who don’t charge as much as union firms. It’s the guild mentality that opposes the entry of lower-cost health care providers into domains long reserved to higher-priced professionals.
Competition, not price-fixing, is best in private markets, and the same is true in the market for countries to attract international businesses.