Streetwise Professor

April 17, 2021

Fight The International Tax Cartel

Filed under: Economics,Politics — cpirrong @ 5:37 pm

In the US, conspiracy/collusion among firms to fix prices is a per se violation of Section 1 of the Sherman Antitrust Act. Per se meaning that it is illegal, full stop. There is no defense that the action is reasonable. The EU has similar rules. So do most G20 nations.

But this is a classic example of “rules for thee, but not for me.” Many governments have been hot to establish a global minimum corporate tax rate. Recently, Treasury Secretary Janet Yellen came out in support–something that the United States has never done officially.

You see, though governments (at least theoretically and rhetorically) think that firms should compete, they are aghast at the idea of governments competing, especially on tax. The ability of capital to flee to low tax jurisdictions sends governments of large nations in particular into paroxysms of fury. Why? Easy: because it constrains governments’ extractive power.

The conversion of the US government to the tax collusion cause (which has long been led by Germany and France) is clearly driven by post-Covid fiscal diarrhea. (And you thought Covid was a respiratory illness, didn’t you?) The trillions in spending continue to mount, with more to come if Biden’s “infrastructure” bill passes. (What’s infrastructure, you ask? What isn’t!) The debt-to-GDP ratio is already in excess of 100 pct, and the end of the climb in the ratio is nowhere in sight. To the extent that the administration has a plan to at least slow it, that plan relies on higher corporate taxes. Hence the need to keep corporate capital in the US, and to prevent it from fleeing to lower tax jurisdictions.

Hence the support for a tax cartel.

Competition is the strongest bulwark of liberty. Indeed, a persuasive hypothesis explaining Europe’s rise to prominence was that its fragmentation promoted competition among polities that limited the extractive power of governments, in contrast to say China or Russia. Even within Europe, the biggest states (e.g., France, Spain) were the most extractive because their size gave them some extractive market power.

Without the option to exit, you are at the mercy of the state.

When governments start to work together–i.e., collude–be afraid. Very afraid. They are colluding against you to deprive you of that exit option. You should want them to compete. Because they will compete by reducing the amount they will take from you.

And if you think that the tax cartel’s burden will fall only on corporations, not you–think again. Capital taxation is extremely inefficient, and reduces labor income. Tax capital, and there is less capital. Less capital, labor is less productive. Labor is less productive, wages fall.

Not to mention that the fiscal fillip will support spending that largely wasteful–wealth destroying, not wealth enhancing. It diverts resources from productive to unproductive uses.

So fight the tax cartel. It is an anathema to your freedom and economic well-being.

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  1. There are cartels all through our societies, with the approval, even enforcement of government. What is a union but a price fixing cartel, seeking to maximise their members income at the expense of their fellow citizens. Tradesman regulations work the same way. Competition between state governments is more for show than anything else. Competition in the private sector is more real, even in cartels. Due to the nature of a price fixing agreement they are a gentlemans agreement, not an enforceable contract. Then it turns out that there was not one gentleman in the room.

    Comment by Peewhit — April 18, 2021 @ 1:52 am

  2. “Capital taxation is extremely inefficient, and reduces labor income. Tax capital, and there is less capital. Less capital, labor is less productive. Labor is less productive, wages fall.”

    Quite so. Further, – a restatement of the inefficiency argument – corporate taxes have higher deadweight costs than labour, consumption or property. But they’re a lot more politically palatable. Thus politics urges governments into making us collectively poorer by preferring high deadweight taxation. Competition forces governments away from corporate taxation to those more efficient forms.

    Huzzah for competition and Boo Sucks to cartels therefore.

    Comment by Tim Worstall — April 18, 2021 @ 4:38 am

  3. Alas, the UK’s Chancellor of the Exchequer has announced an increase in Corporation Tax, though he has offset it somewhat with increased allowances for capital investment.

    I’d prefer to see 10%, or even 0%, with no allowances. Keep It Simple Sunak.

    Comment by dearieme — April 18, 2021 @ 8:50 am

  4. @Peewhit–I alluded to the source of your skepticism with my statement that governments criticize cartels “at least theoretically and rhetorically.” But in reality, one of the major benefits that government can provide to industry is to facilitate collusion (which would otherwise not be sustainable due to the incentives to cheat that you mention). The New Deal was basically a national cartelization scheme. Much US agricultural policy is designed to cartelize competitive sectors. Much transportation regulation (the CAB, ICC, etc.) was aimed at limiting price competition. I could go on.

    This is a staple of Chicago economics of my era.

    I mainly bring up government rhetoric on private cartels to illustrate the hypocrisy of tax cartels.

    Comment by cpirrong — April 18, 2021 @ 5:22 pm

  5. “This is a staple of Chicago economics of my era.” It was also a staple of the economics I learnt at my father’s knee. He was very firm on the proposition that no cartel would last long without government support. I don’t know where he got it from. Adam Smith? His own observation and reasoning?

    Comment by dearieme — April 20, 2021 @ 8:37 am

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