The Best Global Tax Reform? Lower Taxes

A recent report from the Tax Justice Network (TJN) boldly asserts that “countries will lose $4.7 trillion over the next 10 years…[and] countries around the world collectively spent $4.66 trillion on public health in a single year” due to tax havens. In light of this seemingly shocking discovery, many groups are now campaigning for global tax reform so that nations will avoid “losing out” on tax revenue. 

The new idea of the “UN tax convention and to create a global tax body under UN auspices” would do the opposite of creating better economic outcomes. 

According to the report, which compiles data from 47 countries, multinational corporations legally avoid paying the highest taxes, mainly by moving to so-called “tax havens.” Tax havens include jurisdictions offering low corporate tax rates, alluring multinational corporations and affluent individuals to seek tax relief by conducting their financial activities there. 

A key player in this process is profit shifting, where companies redirect their profits to low-tax jurisdictions, despite earning most of their revenue in high-tax regions. Small countries like the Cayman Islands, with their corporate tax rate of only 6%, are one of these havens, but there are also more prominent countries like Switzerland and Hong Kong that are favorable homes for large corporations, both having rates under 20%.

It’s perfectly legal for a company to move its headquarters and finances to other countries, but these tax havens can pose a threat when many governments depend on taxes to finance government spending. Rather than risk losing these resources, countries are clamoring for centralized taxation with higher tax rates to level the playing field. 

But there’s a better way.

While these countries are pointing to tax havens to try and place blame for lost tax revenues, there are three fingers pointing back at them. Instead of centralizing a global tax and empowering politicians and bureaucrats, countries with high corporate taxes, like the U.S., with a corporate tax rate of 21%, should consider domestic tax reforms that prioritize lowering corporate taxes and limiting government spending. 

Reduced corporate tax rates, like those in the 2017 Trump tax cuts, can enhance a country’s competitiveness and appeal to businesses instead of driving them to move their money to tax havens. This was the result of those tax cuts as many businesses started moving back to the U.S. or started repatriating their money here. Simultaneously, keeping government spending in check with responsible budgeting prevents escalating the government’s overall burden, reducing the “need” for higher taxes.

While corporate taxes typically pass along the burden to consumers through higher prices, fewer jobs, and lower wages, consumption-based taxes such as final sales and use taxes (not value-added taxes) are less burdensome and more equitable. And these taxes better match economic fluctuations and taxpayers’ ability to pay for spending, which is why more countries (and states) should be moving to them.

Fewer burdensome taxes support more economic growth, resulting in more tax revenue, which many politicians desire. By supporting growth instead of raising taxes and hoping that converts to growth (it won’t), spending can be better balanced, reducing deficits, which is just future taxes. 

While the Tax Justice Network’s findings are interesting, they hardly point to the need for global tax reforms because these tax havens are legal ways to avoid paying higher taxes. Instead, the U.S. and elsewhere should reform their tax system if they hope to foster competition and provide more paths for human flourishing. 

Vance Ginn, Ph.D., is president of Ginn Economic Consulting and chief economist or senior fellow at multiple think tanks across the country. He served as the associate director for economic policy of the White House’s Office of Management and Budget, 2019-20, and resides in Round Rock, Texas. Follow him on Twitter @VanceGinn.