Saturday, 22 June 2013

Graph of the week: Global corporate tax rates

From the Financial Times (it's an interactive feature so you can click on the country to see its specific rates)

It is interesting to note that corporate tax rates have decreased on average by 3 percentage points in the last couple of years for the OECD countries. However the biggest decrease was done just before the onset of the crisis, by 2008. Afterwards corporate taxes slightly increased (due to an immediate response to the crisis) and have, on average, started to decrease slowly since 2010. Some would say this was evidence of austerity, at least the "good" type of austerity where taxes go down combined with spending cuts. However spending cuts in OECD economies were scarce, to say the least, while tax cuts were only applied to corporate taxes while personal income taxes, along with all other forms of taxes like VAT, shot up in some countries. As an effect personal consumption was hit hard, since prices were going up, while people were earning less. 

International competitiveness argument

Going back to the corporate tax rates, still among the highest countries are the US and Japan (40% and 38% respectively). Much was said on how corporate tax rates are a good comparison mechanism for international competitiveness, since investors tend to use these rates to make their decisions, which is particularly applicable concerning FDI flows in developing countries. However, as I've mentioned in an earlier text, institutional strength plays an even more important role for investors choosing where to invest. Corporate tax rates are only one side of the story: 
"It's justifiable to have high tax rates in highly efficient and institutionally strong countries like Denmark, Germany or Sweden [or Japan or the US], since they have other factors that attract capital, investments and motivated individuals into these countries. I'm not saying lower taxes wouldn't help them further increase their competitiveness (as they did in Sweden), but their size of government is somewhat justified by its efficiency in providing public goods and not expropriating wealth. These are the two essential functions of the government anyway, so as long as investors and individuals perceive a stable institutional environment where their wealth won't be diminished by bureaucrats, corruption or similar factors, I guess they would be willing to accept higher taxes.  
For countries like Greece or Croatia ... this certainly isn't the case. Their states are seriously inefficient in providing public goods or in attracting investors via institutional stability, so their emphasis must be either on changing this serial inefficiency of the government from within (via public sector reform) or through lowering the overall tax burden thereby making itself more competitive on the international market."
Note: the quoted excerpt was from a text on personal tax rates. Some countries top the list in both corporate and personal tax rates. Others have a system where labour tends to be much more taxed than capital, while some achieve a balance in the lower equilibrium of both low corporate and personal taxes. 

Also among the top rated are countries like Argentina (35%), Pakistan (35%), Honduras (35%), Angola (35%), Zambia (35%), RSA (34.6%), Brazil (34%), Venezuela (34%), Belgium (34%), France (33.3%), Colombia (33%), India (32.4%), Italy (31.4%), Spain (30%), Mexico (30%). Most of these countries should obviously seek to decrease their high corporate tax rates to attract new investments. They have no way to justify their high taxes with the service (or should I say lack of service) they offer to investors. A weak institutional system like the one in African countries, or some South American countries cannot offer safety, stability or confidence to investors. Even though for some of these countries lower tax rates wouldn't help them achieve inclusinvess, they at least would send a different signal to investors worldwide and perhaps attract a bit more of foreign capital which would eventually help them achieve at least some higher level of institutional stability. 

Take, for example, corporate tax rates in new European countries, ranging from 10% in Bulgaria, 16% in Romania, 19% in Poland, Czech Republic and Hungary, 15% in Latvia and Lithuania, and 21% in Estonia. These countries, and many others from the former Soviet bloc, have realized that until they accumulate enough democratic capital and a high enough level of institutional stability, they can only be competitive via lower corporate rates. 

For the record economically free Nordic countries all have competitive corporate rates below 30%, with Sweden having 22%, Iceland 20%, Finland 24.5%, Denmark 25%, and the only slight exception Norway has 28% (due to the fact that Norway receives 12% of GDP in revenues from corporate taxes - which is primarily because of a lot of oil companies operating there.) In the Nordic example, economic freedom is combined with lower tax rates than in similarly strong institutional environments of other European countries, so no wonder they were able to attract much more capital and hence produce much more growth and value added. Eurozone countries should take note. 

1 comment:

  1. The UK is one among those OECD economies that has slashed its corporate taxes in the past few years. But this hasn't hepled much. Firms are still hoarding cash. This can tell us that either the culprit is somewhere else and that slashing corporate taxes doesn't work in this scenario, or that tax cuts are still too low, i.e. that taxes are still too high. I opt for the former to be true..