In this week’s feature article, Professors Magalhães and Christians argue that adoption of the OECD-led Global Anti-Base Erosion regime (commonly referred to by its peculiar acronym, GloBE) by an increasing number of countries necessitates a shift in the focus of academic attention with regard to the corporate income tax. Whereas pre-GloBE, the key question was the incidence of the corporate income tax, in the post-GloBE world, the key question is inter-nation distribution.

Since the introduction of the corporate income tax in 1906, economists have considered the question of who actually bears the burden of the corporate income tax, the primary candidates being shareholders, owners of capital in general, workers, and consumers. 

In 1962, Arnold Harberger presented a groundbreaking model that went on to become highly influential. He visualized a closed economy with two economic sectors, corporate and non-corporate. A corporate tax will divert investment from the corporate to the non-corporate sector, decreasing the price of corporate stock and increasing the price of non-corporate assets, until the after-tax return in the corporate sector equals the return in the non-corporate sector. The corporate tax is therefore borne by all capital (in fact capital bears more than 100% of the corporate tax burden). In the 1970s, Harberger changed the model to incorporate an open economy with international capital mobility. All else being equal, under this model labor bears all (in fact more than 100%) of the corporate income tax. If only the United States but no other country levied a corporate income tax, U.S. labor would incur large losses while wages in the rest of the world would face a modest rise. In the 1980s, in the face of globalization, Herberger developed a new model. This model turned out to be similar to the initial closed-economy setting in visualizing the whole world as a single economic system. Assuming (perhaps unrealistically) that other countries raise or lower their taxes in tandem with the United States, labor will bear none of the tax.

Do Harberger’s models accurately map the real world? Empirical studies over the last six decades have proven notoriously indecisive. The percentage of the corporate income tax borne by labor has been estimated as anywhere from 0% to 75%. The bottom line is that nobody knows who actually bears the burden of the corporate income tax. The authors nevertheless rely on some recent studies to conclude that shareholders and capital owners shoulder the corporate income tax “to a significant degree.”

As part of the OECD’s attempt to overhaul the international tax regime, GloBE introduced the concept of a 15% minimum tax to which all income produced by large multinationals would be subject. Professors Magalhães and Christians suggest that following the introduction of GloBE and its adoption by a large number of countries, the question of who bears the corporate income tax is largely meaningless, because the baseline case of a no-corporate tax world is no longer relevant. Corporations will pay 15%, the only question being which government will receive it (assuming, perhaps counterfactually, that countries will not continue to engage in tax competition by exploiting ambiguities and weaknesses in the GloBE rules). Thus, instead of asking who bears the burden of the tax, we should now ask, which countries can collect which share of the overall tax revenues.

The authors do not present a definitive view on the subject. They describe the types of questions that need to be asked and some aspects of GloBE that might be relevant in the analysis. Although they do mention the concepts of inter-nation equity, fairness, and justice, it seems that the question they pose is descriptive and not normative. They discuss how countries can operate under the GloBE rules to secure a maximum share of the pie. They describe the pressure that low-tax jurisdictions are under to find alternative strategies to remain competitive. They mention how low-income countries with limited capacity to negotiate with multinationals or implement complex tax regulations may lose out to jurisdictions that are better positioned to enforce GloBE. On the other hand, the article does not consider how to balance competitive normative claims to the tax revenue and how it might be possible to modify the GloBE rules to achieve the appropriate result.

If true that corporate tax incidence is no longer relevant and that the primary focus of a country’s corporate tax regime should be to secure a maximal share of the global tax revenue, this would indeed be a significant development in the field of tax policy. Whether the results of the struggle among countries for a piece of the pie will be more satisfactory than in the pre-GloBE world and how GloBE compares to other possible international tax regimes will undoubtedly be debated among tax scholars in the years to come.