Last year, the American government took the lead in forming a global tax cartel. Initially, only a couple of international bureaucracies like the Organization for Economic Cooperation and Development (OECD) and the governments of the G7 group had signed on to the idea of a global minimum corporate tax rate of 15%.
Since then, more than 130 countries have joined the tax cartel, and the Biden administration has merrily taken the lead on its implementation.
One of their self-imposed duties is to bully countries that do not outright buy into the idea of a global tax rate. It is for this reason that the U.S. government is now canceling its bilateral tax treaty with Hungary.
The tax cartel has one brutal yet simple purpose: to eradicate so-called jurisdictional competition. When governments have to compete with each other, they will lower their taxes until businesses and individuals feel that they get a proper balance between the taxes they pay and the government services that those taxes buy. At that point, they will invest, create jobs, work, and spend money. When the balance is unfavorable, they will migrate to wherever the tax-to-spending equation is more favorable.
There is a grain of beautiful irony in the tax cartel.
It is formed by high-tax governments who, by the very virtue of the cartel, acknowledge that they can’t compete with low-tax jurisdictions. Rather than reforming spending, improving the conditions for career development, entrepreneurship, and investments, high-tax governments want to make it pointless for taxpayers to move anywhere else.
It is hardly surprising that this irony has escaped the governments that participate in the tax cartel. Equally unsurprising is the fact that there are holdouts, countries that refuse to give in to the cartel’s bullying. The cartel has not yet gone into effect, namely, and Hungary is a big reason for that. The government in Budapest has continued to block the EU from joining the cartel and imposing the 15% tax rate. They have been so successful that President Biden—the aspiring Godfather of the tax cartel—has ordered the U.S. Department of the Treasury to terminate the current tax treaty between the two countries.
Let us call a spade a spade: this is an act of punishment. Washington is trying to whip Budapest into compliance, and it has two reasons to do it. First, the American foreign-policy establishment is back in charge after four years of Trump’s cooperative approach to global affairs. Predictably, they rely on their time-tested, cement-headed neocon doctrine for how to win over the world on their side. If a country refuses to play by their rules, the U.S. administration will exclude, sanction, banish, and publicly flog the recalcitrant nation.
The second reason for Washington’s canceling of the bilateral tax treaty with Budapest is of course to get the global tax cartel up and running. So long as Hungary balks at ratifying it, the EU cannot participate in the cartel, and their resistance is totally understandable. Since 2017 the Hungarian tax rate on corporate income has been a flat 9%. As Figure 1 shows, this has proven to be a formidable success: since the tax rate dropped from 19% to 9%, capital formation has expanded by 57%, in real terms.
Hungary is one of two EU member states that currently tax corporations below 15%; the other, Ireland, is at 12.5%. While the Irish seem ready to play ball with the global tax cartel, Figure 1 easily explains why the Hungarians are still holding out. Which, in turn, is why the U.S. government has ramped up its bullying of Budapest.
The Biden administration’s disrespectful treatment of Hungary is only exacerbated when we examine their attempt at defending the treaty cancellation.
For starters, they haven’t even acknowledged the true treaty status between the two countries. While the original treaty is from 1979, the U.S. government makes no mention of a new version, which was signed by both countries in 2010. However, its ratification has been held up in the U.S. Senate for the past 12 years.
The culprit is Senator Rand Paul, a Republican from Kentucky, whose opposition was not limited to the 2010 treaty with Hungary. He also took issue with new treaties with Switzerland and Luxembourg, citing government “snooping” and the erosion of privacy. While his concerns may be commendable, the good Senator’s libertarian passions have now effectively weaponized the tax-treaty issue for the Biden administration. While the 2010 treaty would have substantially updated the tax-law relations between America and Hungary, the fact that it has not been ratified gave the Biden administration a slick treaty-cancellation argument:
Hungary made the U.S. government’s longstanding concerns with the 1979 tax treaty worse by blocking the EU Directive to implement a global minimum tax,” the Treasury spokesperson said. “If Hungary implemented a global minimum tax, this treaty would be less one-sided. Refusing to do so could exacerbate Hungary’s status as a treaty-shopping jurisdiction, further disadvantaging the United States.”
The 2010 treaty, which again is available on the U.S. Treasury’s own website, addresses issues of tax evasion and double taxation. It is also written to take into account the fact that Hungary by 2010 was a member of the European Union.
Next, the Biden administration cites the current Hungarian tax rate as good enough reason to cancel its treaty. They unabashedly lament the success that Hungary has had with it:
A Treasury spokesperson said that since Hungary lowered its corporate tax rate to 9%—less than half of the 21% U.S. rate—the benefits of the tax treaty unilaterally benefit Hungary and no longer benefit the United States. “The benefits are no longer reciprocal—with a significant loss of potential revenues to the United States and little in return for U.S. business and investment in Hungary.”
This is an astounding statement. First, it reveals the true purpose behind the cancellation of the U.S.-Hungarian tax treaty, namely, to strongarm a holdout into submission before the tax cartel. Second, it sets a new tone for bilateral treaties: unless the treaties unilaterally benefit the United States and her interests, the treaty is not worth the ink it is written with.
Is it really the official position of the Biden administration that the United States should no longer enter into any treaty that can be of mutual benefit to the signatories? What happened to the concept of respecting other sovereign nations?
With this new policy for tax treaties, the U.S. government leaves little to imagination in terms of what is coming down the pike. In a video from 2021, renowned economist and expert on international tax policy Dan Mitchell predicts with chilling clarity what kind of Pandora’s Box this tax cartel has opened. It is, he explains, “simply a matter of time” before the cartel is expanded to taxes on capital gains and even to personal-income taxes.
Mitchell will be proven correct sooner than most people realize, especially on the second point, and here is why. According to statistics from the Internal Revenue Service (the U.S. tax agency), only about one in five businesses in America is incorporated. In 2015, the latest year for which the IRS published detailed business revenue data, the non-incorporated businesses made almost $7 trillion in total revenue.
In other words, non-incorporated businesses represent a sizable tax base that falls under the personal income tax code.
Here, again, Hungary holds a formidable advantage over the United States, with a flat, simple and transparent 15% personal income-tax rate. Compare this to the multi-bracket American version, where taxpayers fall into three different categories—single, married filing jointly, and heads of household—and then pay different rates on the same income, depending on which category they belong to.
For a married couple filing jointly, the rates apply as follows:
- 10% on the first $20,550 of taxable income;
- 12% on the next $63,000;
- 22% on the next $94,600;
- 24% on the next $161,950;
- 32% on the next $91,800;
- 35% on the next $215,950; and
- 37% on anything above $647,850.
Needless to say, very few Americans ever reach higher than the 22% bracket, but already at that level they are dealing with a system that is more complicated than the Hungarian one. Furthermore, if they have only one income earner and file under the “head of household” category, the same income that tops the 22% bracket for a married couple filing jointly, is now taxed at the 32% rate.
In other words, the U.S. tax code is complicated. It is also uncompetitive. Suppose that an American business owner declares $1 million in taxable income. Filing jointly with his wife, he calculates his taxes across the seven brackets and ends up owing the government $305,000.
This effective tax rate of 30.5% is almost exactly twice the rate in Hungary, where he would have saved himself and his business a bit over $150,000 per year. At a $2 million business income, his annual savings would have been almost $375,000.
There are, of course, other differences to the tax codes of the two countries; this comparison is for illustrative purposes only. Nevertheless, it shows how lucrative it can seem to a tax-hungry U.S. government to expand a cartel for corporate taxes to personal taxes as well.
Which pretty much sums up the argument behind both the tax cartel and the cancellation of the tax treaty between the United States and Hungary. A government lusting for more of its citizens’ money will not pay attention to the research and data that explain the benefits of low taxes. Tax-cartel proponents and others who want higher taxes tend to look away from the empirical findings against their case. To them, all that matters is the relative tax rate, i.e., whether or not there are differences in the rate between countries. If there are differences, they acknowledge, economic activity will gravitate toward the lower-tax jurisdiction. If there are no differences, economic activity will stay unchanged.
This is, of course, not true. First of all, unless a uniform tax rate across all jurisdictions settles for the lowest existing rate, some jurisdictions will suffer tax hikes. In this case, Hungary would have to raise its rate from 9% to 15%, with negative consequences for business investments, jobs creation, and economic growth. Since it is a safe bet that no country in the tax cartel will lower its corporate tax, the higher taxes in low-tax jurisdictions will constitute a net rise in the global tax burden on businesses.
In other words, if there is any change in economic activity as a result of the tax cartel, it is going to be for the worse.
Second, proponents of a global uniform tax code—the de facto if not de jure meaning of a tax cartel—does not in itself stimulate economic activity. There is an often-heard myth among specialists in the welfare-theory underworld of economics that tax neutrality makes businesses invest more, hire more people and produce more. This is not the case: without going into the technical sophistry of microeconomics, the efficiency gains that welfare-theorists claim to extract from uniform tax rates are, without exception, purely theoretical. Nobody has ever been able to define them in real life.
Therefore, we can safely conclude that once the tax cartel is in place, the net effect will be a diminution of overall economic activity. However, this is only the beginning: as Dan Mitchell points out above, it is only a matter of time before the governments that participate in the tax cartel realize how much they can raise taxes without risking economically motivated emigration.
Once governments have built a tax wall around their citizens, only God and greedy politicians know how high taxes will eventually become.