Op-Ed Contributors: How to End International Tax Competition
Globally, corporate taxation is ripe for collective action problems. If nations didn’t have to compete with one another, they would all benefit from imposing higher corporate taxes. But they do have to compete, so each individual country has a self-interested reason to lower its corporate tax rate, undercutting other countries to attract investment. Even if all other states agree to coordinate (or “harmonize”) to maintain higher rates of taxation, individual countries will still face an incentive to lower their tax rates to attract greater investment.
The results of global tax competition are staggering: In nations that are members of the Organization for Economic Development and Cooperation, the average nominal corporate tax rate has fallen to 22.5 percent from 50 percent in 1975 as globalization and capital mobility have spurred competition. During tax holidays such as the one that President Trump proposes, corporations are able to repatriate profits at enormous savings. The last tax holiday in the United States was in 2004, when the American Jobs Creation Act allowed corporations a one-time opportunity to repatriate profits at the heavily discounted rate of 5.25 percent. It resulted in corporate tax savings of $62.5 billion. Corporations knew what they stood to gain and so were willing to spend a total of $282 million on lobbying for the holiday. Given the government’s history of tax holidays, corporations know to hold their profits offshore until the next holiday comes around.
When facing this kind of collective action problem, individuals have two options: They can continue to pursue their self-interest, and in doing so contribute to the problem, or coordinate with others to change “the game.” Fixes of the latter kind often require regulatory interventions to enforce cooperation. This is why many think that in the case of global tax competition, the only solution is to support some form of global mechanism that would enforce global tax rates but seriously constrain American sovereignty.
But the Nobel Prize-winning economist Elinor Ostrom’s work showed a middle ground between accepting our fate and ceding our sovereignty. Through the systematic study of the history of collective action problems, she found many solutions that combined individual changes with the creation of institutions to help parties cooperate with one another. No solution to these problems is easy, but before giving up trillions in tax revenues, we should consider whether there might be other ways to mitigate tax competition. By using Professor Ostrom’s case studies as a blueprint, the United States could work with other nations to implement global solutions to tax competition that don’t trample on the sovereignty of individual nations.
Rather than rewarding corporations for keeping their profits offshore, the United States should be a global leader in fighting tax competition. By working with other countries — not against them — we may be able to implement our own solution to this modern-day collective action problem.
This approach could involve incorporating tax harmonization schemes into bilateral or multilateral trade agreements, for example. But these kinds of solutions would require an administration that was willing to work with — rather than against — other global leaders in tackling collective problems, an approach that as yet has not seemed to characterize the Trump administration’s foreign policy philosophy.
There don’t have to be winners and losers. Instead, cooperation can benefit everyone. Tax competition is only one example of how our domestic interests can be harmed by the retreat from global leadership.
via NYT http://nyti.ms/2gVZ2VB
November 2, 2017 at 02:00PM