On the Desirability of the Global Minimum Tax - A Dynamic View

Nora Paulus (), Weihua Ruan () and Benteng Zou ()
Additional contact information
Nora Paulus: DF, Université du Luxembourg
Weihua Ruan: Purdue University Northwest, USA
Benteng Zou: DEM, Université du Luxembourg

DEM Discussion Paper Series from Department of Economics at the University of Luxembourg

Abstract: "Corporate tax competition has driven statutory rates downward for decades, eroding fiscal capacity and raising concerns about global equity. The OECD/G20 Global Minimum Tax (GMT) seeks to halt this “race to the bottom,” yet its dynamic implications remain unclear. We study the GMT with a differential game of international tax competition with mobile capital. Governments set corporate tax rates while multinational firms reallocate capital in response to effective taxwedges created by the minimum tax and the substance-based income exclusion. We distinguish between Markovian behavior, in which governments adjust tax rates in response to current capital allocations, and open-loop behavior, in which they commit to tax paths in advance. We also compare enforcement through Qualified Domestic Minimum Top-up Taxes (QDMTT) and the Income Inclusion Rule (IIR). In the Markovian game, the GMT does not pin down a unique long-run outcome: a continuum of steady states arises under both enforcement regimes, including low-tax configurations. By contrast, under open-loop commitment the dynamic system is saddle-point stable, implying convergence to a unique transition path for given initial conditions. Commitment therefore acts as a dynamic selection device. Whether the economy converges to high- or low-tax configurations depends on enforcement: under QDMTT, a race to the bottom may emerge when public revenue is used inefficiently and the minimum tax is sufficiently high, whereas under IIR such dynamics are ruled out. Overall, the GMT can stabilize tax competition under commitment but does not, in general, eliminate downward pressure on statutory rates."

Keywords: "Dynamic Tax Competition; Qualified Domestic Minimum Top-up Taxes; Income InclusionRule; Global Minimum Taxation." (search for similar items in EconPapers)
JEL-codes: C73 F21 H21 H87 (search for similar items in EconPapers)
Date: 2026
References: Add references at CitEc
Citations:

Downloads: (external link)
https://hdl.handle.net/10993/68053 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:luc:wpaper:26-07

Access Statistics for this paper

More papers in DEM Discussion Paper Series from Department of Economics at the University of Luxembourg Contact information at EDIRC.
Bibliographic data for series maintained by Marina Legrand ().