The increasing disparity between rich and poor, worsened by the pandemic and its associated deficit spending, has revived the political conversation around the wealthy “paying their fair share.” At the G7 finance ministers’ meeting on June 5th, an apparent consensus emerged, whereby the United States, Canada, Italy, France, the United Kingdom, Germany, and Japan all agreed to impose a 15% minimum corporate taxation rate. This new measure would force corporate entities to pay the minimum rate regardless of the jurisdiction they operate in, thus increasing the amount of taxes paid by multinational companies.

The dire state of public finance explains in part the sudden willingness of developed countries to align their fiscal policies to raise more revenue. However, one must delve into the political dynamics of global taxation and its historical context to fully grasp its far-reaching implications. 

Historical context 

The rise in international tax competition caused the global statutory corporate tax rate to fall from 49% to 23% between 1985 and 2019. This competition was brought about in part by the neoliberal ideology that came to dominate the international political-economic discourse from the 1980s and onwards. In short, neoliberalism advocates for the complete transfer of economic power from the public to the private sector. Its early adopters, Ronald Reagan in the United States and Margaret Thatcher in the United Kingdom, normalized the adoption of policies like massive tax cuts for corporations and the rich.

As a result, those who benefited the most from the economic globalization of the past 40 years, namely multinational companies and economic elites, have received the largest tax cuts from governments. They also took advantage of a newfound ease to move money between jurisdictions to shift profits abroad, where they would pay even fewer taxes. This has resulted in what the Organization of Economic Cooperation and Development (OECD) refers to as Base Erosion and Profit Shifting (BEPS), which indicates strategies used by multinational companies that exploit loopholes in tax rules to avoid paying taxes or shift their profits to countries with low rates of taxation.

Biden’s agenda

The agreement made at the G7 summit to impose a 15% corporate tax rate was widely seen as a response to President Joe Biden’s call to raise minimum tax levels on large corporations. As part of his domestic agenda, Biden plans to spend trillions of dollars to improve the United States’ ailing infrastructure, invest in clean energy, and deploy a wide range of measures to aid the shrinking middle class. This “once-in-a-generation” endeavour is costly, however, and requires a big contribution from corporations in the form of increased taxation. 

Biden’s proposal builds upon discussions within the OECD, which consists of 37 countries from the developed world, to overhaul the global taxation system. In fact, the G7 agreement is creating momentum within the OECD to reach a deal that would be the most significant breakthrough in the realm of international tax reform in the last 100 years.

As the prominent superpower in today’s international order, the United States has an unparalleled degree of control over the world economy through its fiscal and monetary policies. In 2020, 400 of the 1000 largest companies in the world were American if measured by market capitalization, which is the total value of a company’s share on the stock market. Due to the sheer size of the country’s economy, the clout of its companies, and the primacy of the American dollar in international transactions, other countries have to take into account the actions taken by American presidents. For example, movements in Canada’s corporate tax rate closely follow those in the United States. This is to ensure that Canadian rates will be on average lower than their American counterparts in order to give Canada a “comparative tax advantage.” In doing so, Canada aims to encourage companies to remain north of the border, rather than integrate into America’s bustling economy.

This suggests that if international tax reform is to take place, the United States must be the one to lead it; however, others also must follow. In short, corporate taxation requires collaboration rather than unilateral action. But why?

Game theory

To understand the international politics of taxation, which go beyond national jurisdictions and require that reforms be implemented jointly with other countries, one has to explore game theory

In a world where tax rates differ between countries, the politics of global taxation resembles the prisoner’s dilemma, a particularly famous example of game theory. The dilemma goes like this: two thieves are caught by the authorities and interrogated in separate rooms. The authorities have no witness and can only obtain a conviction by getting one of the thieves to betray their partner by testifying to the crime. Each thief can either cooperate with the other by remaining silent or defect and agree to testify.

Each thief is therefore faced with a conundrum: cooperate and remain silent, or defect and agree to testify. If both thieves remain silent and thus cooperate with each other, the authorities will give each of them a short sentence. If one defects and the other cooperates, then the defector will go free and the cooperator will receive a long sentence. However, if both defect, each will get a medium-length sentence. Now individually, the best strategy is to defect, but both thieves lose if they adopt the same selfish strategy. However, as a group, it is more advantageous for both thieves to cooperate.

The dilemma’s dynamics apply to entire countries. If a government increases its corporate tax rate to fund programs in domains like health and education while other countries decrease their rates or keep them constant, it can trigger a migration of companies and their profits to the countries with lower corporate tax rates. If every government decreases its tax rate in order to attract more companies, this can trigger a “race to the bottom,” whereby every country loses tax revenue crucial to provide basic services to citizens, without witnessing any influx of companies.

In Canada, for example, governments fear large-scale migration of companies, as a decrease in spending on social services leads to citizen discontentment. This is why the last option, to cooperate by implementing a global minimum corporate tax rate, can result in the proper funding of every country’s public services.

Comparing governments to thieves might seem ironic when it comes to taxation, but the dynamics foreshadowed by game theory have led to a steady decrease in the quality of vital public services in recent decades as a result of shrinking tax revenue. Worse, this has forced governments to shift the burden of taxation onto the middle and working classes, which are more sedentary when compared to increasingly mobile companies. This is why the G7 agreement is so important. As outlined in the prisoner’s dilemma, it puts an end to countries embracing lower tax rates to attract companies away from each other. It also signals that the G7 governments will cooperate and adopt a mutually beneficial stance on corporate taxation after decades of competition.

Breaking consensus

The UK was the first to break rank with the United States’ proposal. Reeling from the impact of Brexit on its financial sector, Britain is seeking to exclude the City of London’s financial services companies from the agreement, citing the need to remain an “attractive place to do business.” Switzerland, which relies on low taxation to attract wealth and investment, has also requested a similar exemption.

Both Britain’s and Switzerland’s requests highlight a difference in outlook for global tax reform between Europe and the United States. The former mainly seeks to target American tech companies with the reform while shielding its own industries, while the latter would rather avoid targeting its tech champions. This type of political friction threatens to derail the entire deal in the coming months.


Differing perspectives on which industries should be affected is not the only problem threatening the plans for reform. Critics were quick to point out how the reform itself did not go far enough. Oxfam exposed the deal as merely normalizing the laughably low rates already in place in tax havens such as Ireland, Switzerland, and Singapore, which are already around 15%. 

Others, like the Tax Justice Network and Eurodad, criticized the deal based on how it would deprive poorer countries – where multinational companies also operate – of tax revenues by shifting tax dollars to richer countries, where corporate headquarters are often located.

The fact that tech giants like Facebook, Google, and Amazon all reacted positively to the news of the tax also highlights the weakness of the agreement. Some analysts have advanced figures closer to a 25% tax rate as being more appropriate than the mere 15% proposed.

Hope on the horizon

Nonetheless, the deal has the potential to stop the drain on public finance. The agreement itself represents a huge acknowledgement that multinational companies must pay taxes, regardless of the claim that corporate tax cuts generate economic activity. The wording of the agreement, which states a minimum rate of “at least” 15%, also sets the stage for a potentially higher rate in the future.

The deal is also a signal to businesses that, after decades of damaging neoliberal politics, governments can reassert power over the private sector to ensure that the wealthy pay their fair share. This is particularly important as the world recovers from the pandemic where the most vulnerable populations bore the brunt of the economic slump. Thus, the G7 agreement represents the hope that a more equal distribution of wealth is within reach. 

Edited by Tuti Sundara

Benoit Dupras

Benoit is from the small northern town of Amos in Quebec, and is currently completing a B.A. in International Relations and Economics at UBC. His main research interests include geopolitics, international...