Can Taxes on Capital Survive Globalization?

August 30, 2006

Probably the most important tax policy story in recent decades has falling statutory tax rates on capital income. As companies and financial capital have gotten more mobile in recent years, tax competition for jobs and investment between countries has forced down statutory tax rates on capital income around the world, particularly throughout Europe.

But how far can this trend continue? Should lawmakers abandon taxes on capital income altogether, and focus on taxing consumption instead? Those are the questions addressed in a provocative new paper from CESifo, a Munich-based research group, titled “Should Capital Income Taxes Survive? And Should They?” From the introduction:

Can capital income taxes survive? And should they? In recent decades these questions have been debated with increasing intensity among tax economists and policy makers, as growing capital mobility and the ensuing tax competition has driven down statutory tax rates on capital income throughout the world.

Those who believe that returns to savings should not be taxed have typically welcomed capital tax competition, hoping that it will push governments towards greater reliance on consumption-based taxation.

However, many other observers fear that an erosion of capital income taxation will undermine the integrity and political legiiimacy of the tax system and lead to greater inequality and to an underprovision of public goods–the well-known spectacle of a ‘race to the bottom’. (full paper here).

The paper is fairly technical, but here’s one popular highlight: the downward trend in corporate income tax rates in OECD countries:

For more on corporate taxes in the U.S., check out our “Corporate Taxes” section.


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