Why Do G7 States Want Tax Cartel?

On June 6 my good friend and fellow libertarian economist, Dan Mitchell, took on the corporate tax cartel now being formed by the G7 industrialized nations:

Biden’s tax agenda – especially the proposed increase in the corporate rate – would be very bad for American competitiveness. We know this is true because the Administration wants to violate the sovereignty of other nations with a scheme that would require all nations to impose a minimum corporate tax rate of 15 percent.

Mitchell also notes that

the White House openly says it wants to export bad policy to other nations “so that foreign corporations aren’t advantaged and foreign countries can’t try to get a competitive edge”.

This is where the G7 countries come into the picture: Canada, France, Germany, Italy, the U.K. and the United States have indeed agreed to form a tax cartel. Its purpose is, simply, to set a floor for the taxation of corporate income; although it is unclear how they intend to enforce the cartel, the mere fact that it now exists is a significant change in tax policy – and it is not for the better.

But it doesn’t stop there. What we have just seen is only the beginning. The OECD, an international so-called think tank in Paris, has been trying to create a global tax cartel for at least 20 years. For just as long, Dan Mitchell has been leading the fight against this cartel; we all owe him a thank you for the fact that this cartel – the “OPEC for politicians” as Mitchell calls it – has taken this long for the first part of the tax cartel to form. But once we have placed gratitude where it belongs, we also need to keep in mind that the next step for this cartel is the personal income tax. In all likelihood, other taxes will follow: sales taxes, the Value Added Tax, excise taxes, property taxes, wealth taxes, death taxes… the possibilities for a global tax cartel are endless.

They are also much more likely than we would like to believe. The only thing more persistent than the tax-cartel efforts by government interests across the planet are the terrible economic consequences that the cartel will inflict upon us. With the G7 countries now taking the first step toward formalizing what the OECD and other interests have been fighting for over the past couple of decades, we better bring ourselves up to speed very quickly and line up behind a frontline fighter like Dan Mitchell.

One of the key aspects of this tax-cartel campaign is the reason why it exists in the first place. Prosaically, we can refer to it as political greed or a government power grab, but that would be to under-estimate the determination behind the cartel. The idea of a global tax cartel saw the light of day about the same time as the major industrialized welfare states in the world began to sink into permanent budget deficits. This happened during the 1990s but became more pronounced in the lead-up to the constitution of the European Union and the formation of the European currency union. Table 1 reports the fiscal balance of the consolidated government sector in 27 EU member states. The numbers indicate the percentage of spending that was funded by deficits; red, of course is a deficit. Countries whose names are marked in red did not see a single year with a budget surplus:

Table 1

Source of raw data: Eurostat

It is the persistence of budget deficits – which of course the United States government is all too familiar with – that drives the tax cartel. Those deficits, in turn, are caused by excessive government spending.

Now, if the story stopped here, it should not be too hard to convince democratically elected politicians that it is time to reduce the size of government until spending is aligned with revenue. However, the spending that drives the deficits is not just any type of spending: it is ideologically driven and manifests itself in the welfare state. This spending, which totally dominates government outlays in modern, western economies, aims to redistribute income, consumption and wealth between individual citizens.

Economic redistribution, plainly.

Figure 1 reports the share of consolidated government outlays that went to the welfare state in 13 European countries from 1995 through 2017. The selection of countries is based solely on the availability of relevant data: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Sweden. In the aggregate, the governments in these countries use more than 71 percent of their appropriations for the purposes of income redistribution:

Figure 1

Source of raw data: OECD

In other words, at the end of the day the tax cartel that is now emerging under the banner of the G7 countries, is in reality a welfare-state cartel. It exists to secure as much tax revenue as possible for governments that want to take from Pete and give to Paul.

In coming articles we will examine this political cartel in greater detail. Until then, make sure to subscribe to our Economic Newsletter and get our weekly Stagflation Updates in the bargain!