Corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. ation is one of the most rapidly changing areas of tax policy. As capital and labor have become more mobile in recent decades, the dominant trend around the globe has been toward lower corporate tax rates as countries compete for jobs and investment.
This trend has been especially sharp throughout Europe, where the close proximity and economic similarity of countries like Ireland, Germany, Greece and many Eastern European nations has led to intense corporate tax competition. That competition has resulted in sharply lower corporate tax rates around the world in the past decade.
One excellent overview of these trends comes from KPMG’s recently released 2006 Corporate Tax Rate Survey. The survey monitors corporate tax rate trends in 86 countries, from 1993 to 2006. From the summary:
The survey has recorded a consistent and dramatic reduction in corporate tax rates over that 14-year period. This reduction began in the mid-1980s in the United Kingdom when the government of Margaret Thatcher lowered the corporate tax rate from 52 percent to 35 percent between 1982 and 1986, forcing other countries to follow suit.
Once one major industrialized economy cuts its rates, others seem compelled to do the same, in a process of international tax competition that continues and intensifies over time. In the past 14 years, the average corporate tax rate of countries surveyed by KPMG declined nearly 29 percent (28.7), dropping from an average of 38 percent to 27.1 percent…
This competition suggests that there must be some benefit in having low corporate taxes, and indeed it appears that countries that adopt comparatively low tax rates tend to do better in terms of growth and inward investment than those that do not… In the long term, low tax rates should attract more inward investment, which should expand the economy and thereby provide a greater tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. . But in the short to medium term there is often a need for measures to offset the impact of low tax rates, such as improving spending efficiency or relying more on other sources of revenues, such as indirect taxAn indirect tax is imposed on one person or group, like manufacturers, then shifted to a different payer, usually the consumer. Unlike direct taxes, indirect taxes are levied on goods and services, not individual payers, and collected by the retailer or manufacturer. Sales and Value-Added Taxes (VATs) are two examples of indirect taxes. es.
The practical answer favored by some governments seems to be to combine favorable tax rates with a broadening of the tax collection system by reducing tax breaks and loopholes. This strategy was used with conspicuous success by tax reformers in the Scandinavian countries as well as in Ireland, and is finding its way into Eastern Europe. The new German government plans to propose a package of tax reforms that broadly follows this model…
In summary, from our past 14 years’ tracking experience it appears to be economically and socially desirable for countries to strive for lower corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. es. Corporations are sensitive to income tax rates, and the enhanced mobility of capital and labor all over the world increases their ability to transfer functions from a high tax regime to a low-tax country.
Here are two illuminating figures from the report. The first shows the steep downward trend in average corporate tax rates around the globe since 1993:
Here’s another, illustrating how the U.S. and France are the only G-7 countries that haven’t responded to international tax competition by lowering corporate tax rates and broadening tax bases: