We may have seen the end of a trend. Since the Beatle song from 1966, Taxman, which was a lament about high taxes, tax rates have gone down quite a bit all over the world, especially for companies. It seems like things are changing now. What does that mean for investors?
First, a word about why rates had fallen so much. Tax competition between countries plays an important role in this. With lower rates you can lure companies and still fill the treasury better. Although these are real dollars or euros for the treasury, they do not usually attract real economic activity. The main result is that multinationals use all sorts of clever tricks to ensure that profits are low in countries with high rates (and vice versa).
There was growing international criticism of this economic sham. It pushes profit taxes ever lower, because otherwise companies - or their paper profits - will move. Evaders also undermine the tax morale of those who do pay the full amount. Ultimately, these tax tricks create all sorts of distortions, because governments have to get the resources from somewhere else. Then you get higher taxes on labor, for example - because workers are simply less transient - and that costs jobs.
Especially now that Covid and climate ambitions are putting a hefty strain on budgets, additional tax revenues are welcome - including in the US. This is one of the driving forces behind the G7 proposal for a minimum profit tax of 15%. This proposal - which is still a long way off - would provide governments with direct money and could stop the race to the bottom.