How high should the Minimum Tax be?

Abstract

In 2016, the Organisation for Economic Co-operation and Development (OECD) created the Inclusive Framework on BEPS. This multilateral organization seeks to create and implement policy responses to economic developments that rendered existing global tax agreements outdated. The Inclusive Framework published blueprints for a global plan to combat profit shifting in 2020. This notably includes a global minimum corporate income tax rate.If it is too low, it hardly reduces incentive for MNEs to shift their profits and the main difference it makes is that tax havens can increase their tax rates without fear of competition from other havens with even lower rates. Setting the tax rate for this minimum tax comes with a complicated trade-off. If it is too low, almost all of the revenue gains accrue in tax havens and non-havens face the economic effects caused by their firms facing higher costs without getting much in return. If it is too high, it will reduce profit shifting to such a large extent that the minimum tax will cost tax havens much more than they gain from it. At that point, they are incentivized to undermine the system. I calculate how tax revenues per jurisdiction change as a consequence of the introduction of a minimum corporate income tax rate, using data on profit shifting from Tørsløv et al. (2018) and mathematical modelling of the relationship between tax rates and profit shifting based on the Kanbur-Keen model (Kanbur and Keen 1993; Keen and Konrad 2013). Using this output I recommend an optimal minimum rate for various metrics of optimality. I find that 15%, the rate currently chosen in the proposals, is the most recommendable tax rate.