Lien Zoom.

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 mitigate 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 tax wedges 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. (with Weihua Ruan and Benteng Zou)