Australia should reject global tax minimum

The OECD has long railed against what they consider to be the “problem” of international tax competition. The Brussels-based bureaucracy has argued that tax competition puts downward pressure on tax rates, as countries compete to attract mobile labour and capital investment. Their latest response is to argue for a global tax minimum of 15% for all developed countries, which would force some countries (such as Ireland & Hungary) to increase their company tax rates, and would prevent other countries from cutting taxes “too much”. This is a bad idea.

The last hundred years has seen a steady increase in government tax and spending across the developed world, and it is very likely that tax rates in most countries are already much higher than needed to maximise wellbeing. Unfortunately, there is strong political pressure to continue the growth of government into the future. The most effective (perhaps only) institutional factor that works against this never-ending growth of government is the existence of tax competition.

History is littered with examples of workers and investors trying to escape countries that have bad public policy and excessive taxes. In those situations, the two options for the dodgy country are either to improve their public policy (so that people don’t want to leave), or prevent people from leaving. The introduction of a global tax minimum effectively prevents people from leaving to low-tax countries, which makes it easier for countries to get away with high tax rates. The alternative preferred by economic liberals is to maintain a healthy competition between countries, so that they are always striving to improve.

Australia should reject the call for a global tax minimum, and should strongly reaffirm the importance of competition (including tax competition) between nations.