Pareto-Improving Minimum Corporate Taxation

IMF Working Papers, October 22, 2021

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The recent international agreement on a minimum effective corporate tax rate marks a profound change in global tax arrangements.
The appropriate level of that minimum "has been, and remains, extremely contentious."
The paper explores the strategic responses to a minimum tax—the policy objective being "to change the rules of tax competition game"—which are critical for assessing the design, welfare impact, and prospects for this policy innovation.
Analysis and calibration "plausibly suggest sizable scope for minima that are Pareto-improving, benefiting low as well as high tax countries, over the uncoordinated equilibrium."

The paper focuses on strategic responses to a minimum effective corporate tax rate in the context of international tax competition.
Key analytical emphasis:
- Best response dynamics in a competition game among jurisdictions.
- Effects on corporate tax avoidance and residence-country taxation.
- Welfare comparisons between coordinated minima and the uncoordinated equilibrium.
Calibration results indicate plausible parameterizations under which a minimum tax can be Pareto-improving for both low-tax and high-tax countries.

The minimum effective corporate tax rate is a fundamental policy innovation with the objective to change the rules of tax competition.
Design choices for the minimum (including its level) are central because they influence strategic responses by countries and the overall welfare outcome.
The paper’s findings support the view that appropriately designed minima can yield gains across countries, not only for high-tax jurisdictions.