Feeds:
Posts
Comments

Archive for the ‘Taxation’ Category

Last month, I revealed that even Paul Krugman agreed with the core principle of the Laffer Curve.

Today, we have another unlikely ally. Regular readers know that I’m not a big fan of the Organization for Economic Cooperation and Development. The Paris-based international bureaucracy routinely urges higher tax burdens, both in the United States and elsewhere in the world.

But the professional economists who work for the OECD are much better than the political appointees who push a statist agenda.

So when I saw that three of them (Oguzhan Akgun, David Bartolini, and Boris Cournède) produced a study estimating the relationship between tax rates and tax revenues, I was very curious to see the results.

They start by openly acknowledging that high tax rates can backfire.

This paper investigates the capacity of governments to raise revenue by assessing the ways in which tax receipts respond to rates… Revenue returns from tax increases can be expected to decrease with the level of tax rates, because higher rates exacerbate disincentives to produce and raise incentives to avoid taxation. These two main channels can therefore imply that tax receipts rise less than proportionately with rates and may peak at a given point.

Given the OECD’s love affair with higher tax burdens, this is a remarkable admission about an important limit on the ability of governments to grab revenue.

Their estimate of the actual revenue-maximizing burden is almost secondary. But nonetheless still noteworthy.

According to the estimated coefficients in model 5 of Table 3, an EMTR of 25% maximises CIT revenue.

Not that different from the estimates produced at the Tax Foundation and American Enterprise Institute.

Here’s a chart showing the revenue-maximizing level of tax, which varies depending on the degree to which a country has close economic ties with the rest of the world.

Interestingly, the study openly admits that tax competition plays a big role.

Trade openness is found to reduce CIT revenue. The latter is consistent with…international tax competition, which is likely to increase the effects of tax rates on the location of firms or more broadly of their profit-generating activities.

Sadly, the political types at the OECD have a “BEPS” scheme that is designed to curtail tax competition.

Which is a very good argument for why tax competition should be allowed to flourish.

But let’s not digress. Here’s another remarkable admission in the study. The OECD economists point out that it is not a good idea for governments to try to maximize revenue.

Estimates of revenue-maximising rates should not be seen as policy objectives or recommendations, as they imply high levels of economic distortions or tax avoidance.

Amen. I cited a study in 2012 showing that a revenue-maximizing tax rate might destroy as much as $20 of private sector output for every $1 collected by government. Only Bernie Sanders would think that’s a good deal.

Last but not least, the study even points out a class-warfare approach is misguided when looking at personal income taxes.

More progressive broadly defined personal income taxes generally yield more revenue, but very strong progressivity is associated with lower revenue.

Another wise observation.

The bottom line is that high tax rates of any kind are not a good idea.

P.S. The International Monetary Fund inadvertently provided very strong evidence about the Laffer Curve and corporate taxes.

P.P.S. An occasional good study doesn’t change my belief that the OECD no longer should be subsidized by American taxpayers.

Read Full Post »

Assuming elected officials care about the consequences of their actions, the obvious answer to a question isn’t always the right answer.

  • Q: Why should a (sensible) politician oppose the minimum wage, especially since some workers will get a pay hike?

A: Because the bottom rungs of the economic ladder will disappear and marginally skilled people will lose a chance to find employment and develop work skills.

  • Q: Why should a (sensible) politician oppose so-called employment-protection legislation, especially since some employees will be protected from dismissal?

A: Because employers will be less likely to hire workers if they don’t have the freedom to fire them if circumstances change.

  • Q: Why should a (sensible) politician oppose class-warfare taxation, especially since they could redistribute money to 90 percent of voters?

A: Because the short-run benefits of buying votes will be offset by long-run damage to investment, competitiveness, and job creation.

Many politicians are not sensible, of course, which is why bad policy is so common.

So it’s worth noting when someone actually makes the right decision, especially if they do it for the right reason.

With that in mind, President Emmanuel Macron deserves praise for gutting his country’s punitive “exit tax.” The U.K.-based Financial Times has the key details.

French president Emmanuel Macron said that he would remove the so-called exit tax as it was damaging for France’s image as a place to do business. The tax requires those entrepreneurs or investors who hold more than €800,000 in financial assets or at least 50 per cent of a company to pay capital gains up to 15 years after leaving France.  …A finance ministry spokesperson on Saturday confirmed “the removal of the exit tax as it existed.” …”The exit tax sends a negative message to entrepreneurs in France, more than to investors. Why? Because it means that beyond a certain threshold, you are penalised if you leave,” Mr Macron had said… “I don’t want any exit tax. It doesn’t make sense. People are free to invest where they want. I mean, if you are able to attract [investment], good for you, but if not, one should be free to divorce,” added the French president.

Kudos to Macron. He not only points out that such a tax discourages investment and entrepreneurship, but he also makes the moral argument that people should be free to leave a jurisdiction that mistreats them.

To be sure, the proposal isn’t perfect.

Mr Macron has now decided to introduce a new “anti-abuse” tax targeted at assets sold within two years of someone leaving the country. …“The new system will henceforth target divestments occurring shortly after leaving France — two years — to avoid letting people make short trips abroad in order to optimise tax efficiencies,” added the spokesperson.

This is why I gave the plan two-plus cheers instead of three cheers.  Though I understand the political calculation. It would create a lot of controversy if a rich person moved for one year to one of the several European nations that have no capital gains tax (Netherlands, Belgium, Switzerland, etc), sold their assets, and then immediately moved back to France the following year.

The right policy, needless to say, is for there to be no capital gains tax, period.

But let’s not get sidetracked. Here are a few additional details from Reuters.

France imposed the so-called “Exit Tax” in 2011 during the presidency of Nicolas Sarkozy. …Its aim was to stop individuals temporarily changing their tax domicile in order to skirt French taxes but pro-business President Emmanuel Macron says it damages France’s attractiveness as an investment destination.

Yes, you read correctly, the class-warfare policy wasn’t imposed by the hard-left Francois Hollande, but by the Nicolas Sarkozy, the supposed conservative but de-facto leftist who preceded him.

What’s particularly bizarre is that Macron was a senior official for Hollande, yet he is the pro-market reformer who is trying to save France.

P.S. I’m embarrassed to admit that the United States has a very punitive exit tax (which Hillary Clinton wanted to make even worse).

P.P.S. Since one of my three examples at the beginning of today’s column dealt with the perverse consequences of “employment-protection laws,” I suppose it’s worth noting that’s another area where Macron is trying to reduce government intervention.

P.P.P.S. While Macron is a pro-market reformer at the national level, he advocates very bad ideas for the European Union.

Read Full Post »

If the goal is higher living standards, then higher levels of productivity are necessary. And that requires entrepreneurship and innovation.

But bad tax policy can be an obstacle to the economic choices that create a better future.

I’ve already shared lots of research showing how punitive tax rates undermine growth, but it never hurts to add to the collection.

Let’s look at a new study by Ufuk Akcigit, John Grigsby, Tom Nicholas, and Stefanie Stantcheva. Here’s the issue they investigated.

…do taxes affect innovation? If innovation is the result of intentional effort and taxes reduce the expected net return from it, the answer to this question should be yes. Yet, when we think of path-breaking superstar inventors from history…we often imagine hard-working and driven scientists, who ignore financial incentives and merely seek intellectual achievement. More generally, if taxes affect the amount of innovation, do they also affect the quality of the innovations produced? Do they affect where inventors decide to locate and what firms they work for? …In this paper, we…provide new evidence on the effects of taxation on innovation. Our goal is to systematically analyze the effects of both personal and corporate income taxation on inventors as well as on firms that do R&D over the 20th century.

To perform their analysis, the economists gathered some very interesting data on the evolution of tax policy at the state level. Such as when personal income taxes were adopted.

By the way, I may have discovered an error. They show Connecticut’s income tax being imposed in 1969, but my understanding is that the tax was first levied less than 30 years ago.

In any event, the authors also show how, over time, states have taxed upper-income households.

They look at 20th-century data. If you want more up-to-date numbers, you can click here.

But let’s not digress. Here are some of the findings from the study.

We use OLS to study the baseline relationship between taxes and innovation, exploiting within-state tax changes over time, our instrumental variable approach and the border county design. On the personal income tax side, we consider average and marginal tax rates, both for the median income level and for top earners. Our corporate tax measure is the top corporate tax rate. We find that personal and corporate income taxes have significant effects at the state level on patents, citations (which are a well-established marker of the quality of patents), inventors and “superstar” inventors in the state, and the share of patents produced by firms as opposed to individuals. The implied elasticities of patents, inventors, and citations at the macro level are between 2 and 3.4 for personal income taxes and between 2.5 and 3.5 for the corporate tax. We show that these effects cannot be fully accounted for by inventors moving across state lines and therefore do not merely reflect “zero-sum” business-stealing of one state from other states.

Here are further details about the statewide impact of tax policy.

A one percentage point increase in either the median or top marginal tax rate is associated with approximately a 4% decline in patents, citations, and inventors, and a close to 5% decline in the number of superstar inventors in the state. The effects of average personal tax rates are even larger. A one percentage increase in the average tax rate at the 90th income percentile is associated with a roughly 6% decline in patents, citations, and inventors and an 8% decline in superstar inventors. For the average tax rate at the median income level, the effects are closer to 10% for patents, citations, and inventors, and 15% for superstar inventors.

At the risk of understatement, that’s clear evidence that class-warfare policy has a negative effect.

The study also looked at several case studies of how states performed after significant tax changes.

…case studies provide particularly clear visual evidence of a strong negative relationship between taxes and innovation. When combined with the macro state-level regressions, the instrumental variable approach and the border county analysis, the results overall bolster the conclusion that taxes were significantly negatively related to innovation outcomes at the state level.

Here’s the example of Delaware.

For what it’s worth, we have powerful 21st-century examples of the consequences of bad tax policy. Just think New JerseyCalifornia, and Illinois.

But I’m digressing again.

Back to the study, were we find that the authors also look at how tax policy affects the decisions of people and companies.

We then turn to the micro-level, i.e., individual firms and inventors. …we find that taxes have significant negative effects on the quantity and quality (as measured by citations) of patents produced by inventors, including on the likelihood of producing a highly successful patent (which gathers many citations). At the individual inventor level, the elasticity of patents to the personal income tax is 0.6-0.7, and the elasticity of citations is 0.8-0.9. …we show that individual inventors are negatively affected by the corporate tax rate, but much less so than by personal income taxes. …We find that inventors are significantly less likely to locate in states with higher taxes. The elasticity to the net-of-tax rate of the number of inventors residing in a state is 0.11 for inventors who are from that state and 1.23 for inventors not from that state. Inventors who work for companies are particularly elastic to taxes.

And here are additional details about the micro findings.

…patenting is significantly negatively affected by personal income taxes. A one percentage point higher tax rate at the individual level decreases the likelihood of having a patent in the next 3 years by 0.63 percentage points. Similarly, the likelihood of having high quality patents with more than 10 citations decreases by 0.6 percentage points for every percentage point increase in the personal tax rate. …We find that a one percentage point increase in the personal tax rate leads to a 1.1 percent decline in the number of patents and a 1.4-1.7 percent decline in the number of citations, conditional on having any. …the likelihood of having a corporate patent also reacts very negatively to the personal tax rate… A one percentage point decrease in the corporate tax rate increases patents by 4% and citations by around 3.5%. The IV results are of similar magnitudes, but again even stronger. According to the IV specification, a one percentage point decrease in the corporate tax rate increases patents by 6% and citations by 5%.

Here are some of the conclusions from the study.

Taxation – in the form of both personal income taxes and corporate income taxes – matters for innovation along the intensive and extensive margins, and both at the micro and macro levels. Taxes affect the amount of innovation, the quality of innovation, and the location of inventive activity. The effects are economically large especially at the macro state-level, where cross-state spillovers and extensive margin location and entry decisions compound the micro, individual-level elasticities. …while our analysis focuses on the relationship between taxation and innovation, our data and approach have much broader implications. We find that taxes have important effects on intensive and extensive margin decisions, on the mobility of people and where inventors and firms choose to locate.

In other words, the bottom line is that tax rates should be as low as possible to produce as much prosperity as possible.

P.S. If you check the postscript of this column, you’ll see that there is also data showing how inventors respond to international tax policy. And there’s similar data for top-level entrepreneurs.

Read Full Post »

The value-added tax was first imposed in Europe starting about 50 years ago. Politicians in nations like France approve of this tax because it is generally hidden, so it is relatively easy to periodically raise the rate.

And that’s the reason I am vociferously opposed to the VAT. I don’t think it’s a coincidence that the burden of government spending dramatically increased in Europe once politicians got their hands on a new source of revenue.

Simply stated, I don’t want that to happen in America.

Now I have new evidence to support that position.

We’ll start by crossing the Pacific to see what’s happening in Japan, as reported by Reuters.

Japanese Prime Minister Shinzo Abe vowed to proceed with next year’s scheduled sales tax hike “by all means”… Abe said his ruling Liberal Democratic Party (LDP) won last year’s lower house election with a pledge to use proceeds from the sales tax increase to make Japan’s social welfare system more sustainable. …his plan to raise the tax to 10 percent from 8 percent in October next year. Abe twice postponed the tax hike after an increase to 8 percent from 5 percent in 2014 tipped Japan into recession.

I give Prime Minister Abe credit for honesty. He openly admits that he wants more revenue to finance even bigger government.

But that doesn’t make it a good idea. Japan has been experimenting with bigger government for the past 25-plus years and it hasn’t led to good results. The VAT was just 3 percent in 1997 and the Prime Minster now wants it to be three times higher.

All of which is sad since Japan used to be one of the world’s most market-oriented nations.

You also won’t be surprised to learn that the OECD is being a cheerleader for a higher VAT in Japan.

Speaking of which, let’s look at what a new OECD report says about value-added taxes.

VAT revenues have reached historically high levels in most countries… Between 2008 and 2015, the OECD average standard VAT rate increased by 1.5 percentage points, from 17.6% to a record level of 19.2%, accelerating a longer term rise in standard VAT rates… VAT rates were raised at least once in 23 countries between 2008 and 2018, and 12 countries now have a standard rate of at least 22%, against only six in 2008… Raising standard VAT rates was a common strategy for countries…as increasing VAT rates provides immediate revenue.

And here’s a chart from the study that tells you everything you need to know about how politicians behave once they have a new source of tax revenue.

Incidentally, there’s another part of the report that should be highlighted.

For all intents and purposes, the OECD admits that higher taxes are bad for growth and that class-warfare taxes are the most damaging method of taxation.

…increasing VAT rates…has generally been found to be less detrimental to economic growth than raising direct taxes.

What makes this excerpt amusing (at least to me) is that the bureaucrats obviously want readers to conclude that higher VAT burdens are okay. But by writing “less detrimental to growth,” they are admitting that all tax increases undermine prosperity and that “raising direct taxes” (i.e., levies that target the rich such as personal income tax) is the worst way to generate revenue.

Which is what I’ve been pointing out!

Last but not least, I’ll recycle my video explaining why a VAT would be very bad news for the United States.

Everything that has happened since that video was released in 2009 underscores why it would be incredibly misguided to give Washington a big new source of tax revenue. And that’s true even if the people pushing a VAT have their hearts in the right place.

The only exception to my anti-VAT rigidity is if the 16th Amendment is repealed, and then replaced by something that unambiguously ensures that the income tax is permanently abolished. A nice goal, but I’m not holding my breath.

P.S. One of America’s most statist presidents, Richard Nixon, wanted a VAT. That’s a good reason for the rest of us to be opposed.

Read Full Post »

When I write about the economics of fiscal policy and need to give people an easy-to-understand explanation on how government spending affects growth, I share my four-part video series.

But. other than a much-too-short primer on growth and taxation from 2016, I don’t have something similar for tax policy. So I have to direct people to various columns about marginal tax rates, double taxation, tax favoritism, tax reform, corporate taxation, and tax competition.

Today’s column isn’t going to be a comprehensive analysis of taxes and growth, but it is going to augment the 2016 primer by taking a close look at how some taxes are more destructive than others.

And what makes today’s column noteworthy is that I’ll be citing the work of left-leaning international bureaucracies.

Let’s look at a study from the OECD.

…taxes…affect the decisions of households to save, supply labour and invest in human capital, the decisions of firms to produce, create jobs, invest and innovate, as well as the choice of savings channels and assets by investors. What matters for these decisions is not only the level of taxes but also the way in which different tax instruments are designed and combined to generate revenues…investigating how tax structures could best be designed to promote economic growth is a key issue for tax policy making. … this study looks at consequences of taxes for both GDP per capita levels and their transitional growth rates.

For all intents and purposes, the economists at the OECD wanted to learn more about how taxes distort the quantity and quality of labor and capital, as illustrated by this flowchart from the report.

Here are the main findings (some of which I cited, in an incidental fashion, back in 2014).

The reviewed evidence and the empirical work suggests a “tax and growth ranking” with recurrent taxes on immovable property being the least distortive tax instrument in terms of reducing long-run GDP per capita, followed by consumption taxes (and other property taxes), personal income taxes and corporate income taxes. …relying less on corporate income relative to personal income taxes could increase efficiency. …Focusing on personal income taxation, there is also evidence that flattening the tax schedule could be beneficial for GDP per capita, notably by favouring entrepreneurship. …Estimates in this study point to adverse effects of highly progressive income tax schedules on GDP per capita through both lower labour utilisation and lower productivity… a reduction in the top marginal tax rate is found to raise productivity in industries with potentially high rates of enterprise creation. …Corporate income taxes appear to have a particularly negative impact on GDP per capita.”

Here’s how the study presented the findings. I might quibble with some of the conclusions, but it’s worth noting all the minuses in the columns for marginal tax, progressivity, top rates, dividends, capital gains, and corporate tax.

This is all based on data from relatively prosperous countries.

A new study from the International Monetary Fund, which looks at low-income nations rather than high-income nations, reaches the same conclusion.

The average tax to GDP ratio in low-income countries is 15% compared to that of 30% in advanced economies. Meanwhile, these countries are also those that are in most need of fiscal space for sustainable and inclusive growth. In the past two decades, low-income countries have made substantial efforts in strengthening revenue mobilization. …what is the most desirable tax instrument for fiscal consolidation that balances the efficiency and equity concerns. In this paper, we study quantitatively the macroeconomic and distributional impacts of different tax instruments for low-income countries.

It’s galling that the IMF report implies that there’s a “need for fiscal space” and refers to higher tax burdens as “strengthening revenue mobilization.”

But I assume some of that rhetoric was added at the direction of the political types.

The economists who crunched the numbers produced results that confirm some of the essential principles of supply-side economics.

…we conduct steady state comparison across revenue mobilization schemes where an additional tax revenues equal to 2% GDP in the benchmark economy are raised by VAT, PIT, and CIT respectively. Our quantitative results show that across the three taxes, VAT leads to the least output and consumption losses of respectively 1.8% and 4% due to its non-distorting feature… Overall, we find that among the three taxes, VAT incurs the lowest efficiency costs in terms of aggregate output and consumption, but it could be very regressive… CIT, on the other hand, though causes larger efficiency costs, but has considerable better inequality implications. PIT, however, deteriorates both the economic efficiency and equity, thus is the most detrimental instrument.

Here’s the most important chart from the study. It shows that all taxes undermine prosperity, but that personal income taxes (grey bar) and corporate income tax (white bar) do the most damage.

I’ll close with two observations.

First, these two studies are further confirmation of my observation that many – perhaps most – economists at international bureaucracies generate sensible analysis. They must be very frustrated that their advice is so frequently ignored by the political appointees who push for statist policies.

Second, some well-meaning people look at this type of research and conclude that it would be okay if politicians in America imposed a value-added tax. They overlook that a VAT is bad for growth and are naive if they think a VAT somehow will lead to lower income tax burdens.

Read Full Post »

There’s an ongoing debate about Trump’s endgame on trade. Is he simply a crude protectionist, or is he disrupting the status quo in order to force other nations to reduce their protectionist barriers?

I hope it’s the latter, though I fear it’s the former.

But one thing I can state with certainty is that the President misreads early American history. Here’s a tweet that he recently sent about how America became a strong and rich country during an era when the federal government relied on tariffs to generate revenue.

Trump is partially right. The United States became a rich country in the 1800s when tariffs were a primary source of revenue.

But I have argued that America became rich because of other policies.

  • The federal government was very small, with the budget consuming on average less than 3 percent of the economy’s output.
  • Prior to that awful day in 1913, there was no income tax, no payroll tax, no capital gains tax, no death tax, and no corporate tax.
  • There was no sprawling and intrusive administrative state imposing costly regulations that hinder the private sector.

No, the United States was not a laissez-faire paradise in the 1800s. I’m simply making the case that the economy had more than enough “breathing room” to generate ever-higher levels of national prosperity.

Meaning the economy grew, not because of tariffs, but because other bad policies didn’t exist.

And I’m not the only with this perspective. Eric Boehm’s article in Reason concludes with an offer to trade the income tax for a modest tariff.

After the ratification of the Constitution, the very first law passed by the new Congress was the Tariff Act of 1789. It imposed an 8 percent tax on pretty much all imports into the United States, with the revenue from the tariffs used to fund the new national government and to pay down debts accumulated during the Revolutionary War. …those early tariffs did solve a very practical revenue problem for the early United States government. In those days before H&R Block (indeed, before income taxes) collecting taxes was a difficult prospect. It was much easier to post-up customs officials at every port and collect taxes on the physical stuff that came ashore than to send tax collectors to every town and borough across 13 states to collect taxes from the populace—especially since many of those would-be taxpayers weren’t entirely sold on the idea of a powerful central government, and had a recent history of armed rebellion against excessive taxation. …If Trump wants to make the argument that America should use tariffs to raise revenue, like we did in the 1790s, he better have a plan to abolish all federal taxes on income, investments, and labor. If he wants to have that discussion, well, I’ll listen.

Brian Domitrovic, writing for Forbes, hits the nail on the head. He starts by agreeing with Trump’s assertion about strong growth in the era of tariffs.

…there is a general sense, among the American public, that previously in history, when the American economy really grew at great rates in the extensive stretch of time before the era of free-trade ideology after 1945, we had tariffs. Tariffs and American prosperity went together. Why not try to get that mix again? …This country’s economy regularly grew at rates double ours today, when the tariff was in force from 1789 until early in the 20th century.

But he points out that other factors deserve the credit. Especially the absence of any type of taxation on income.

…there was a condition that obtained in these years that is absent today. That condition is that the tariff was in the main the only form of federal taxation. There was no income or profits tax, no wage tax, no tax on investment gains… When the American economy really boomed under the tariff, over the first half of our history, financiers and entrepreneurs plowed money, energy, and ideas into businesses knowing that all receipts were available to recover costs and make a profit. …A company’s pay rates did not have to exceed the wage needs of the employees so as to cover their income and payroll tax obligations, as today. The money left to a company from sales after costs faced no corporate tax. And there was no inheritance tax.

And I’ll add one additional point. One of the good things about tariffs is that they are inherently self-limiting because of the Laffer Curve. As Alexander Hamilton pointed out, the government gets less revenue if trade taxes get too high.

Anyhow, the moral of today’s story is that tariffs are bad, but they are less bad than the modern welfare/administrative state.

But here’s the challenge.

If we want to solve the problems caused by the western world’s second-most-depressing chart, we’ll need to figure out how to reverse all the bad policies that produced the western world’s most-depressing chart.

Unfortunately, Trump has been making government even bigger, so the likelihood of returning to a tariff-only tax system has dropped from 0.00005 percent to 0.00001 percent.

Read Full Post »

Two months ago, I shared some data on private gun ownership in the United States and declared that those numbers generated “The Most Enjoyable Graph of 2018.”

Now I have something even better because it confirms my hypothesis about tax competition being the most effective way of constraining greedy politicians.

To set the stage, check out these excerpts from a heartwarming story in the Wall Street Journal.

Last year’s corporate tax cut is reducing U.S. tax collections, as expected. But that change is likely to ripple far beyond the country’s borders in the years ahead, shrinking other countries’ tax revenue… The U.S. tax law will reduce what other countries collect from multinational corporations by 1.6% to 13.5%… Companies will be more likely to put profits and real investment in the U.S. than they were before the U.S. lowered its corporate tax rate from 35% to 21%, according to the paper. That will leave fewer corporate profits for other countries to tax. And as that happens, other countries are likely to chase the U.S. by lowering their corporate tax rates, too, creating the potential for what critics have called a race to the bottom. …Mexico, Japan and the U.K. rank near the top of the paper’s list of countries likely to lose revenue… Corporate tax rates steadily declined over the past few decades as countries competed to attract investment.

Amen. This was one of my main arguments last year for the Trump tax plan. Lower tax rates in America will lead to lower taxes elsewhere.

For instance, look at what’s now happening in Germany.

Ever since Donald Trump last year unveiled deep tax cuts for companies in America, German industry has been wracked with fears over the economic fallout. …“In the long term, Germany cannot afford to have a higher tax burden than other countries,” warned Monika Wünnemann, a tax specialist at German business federation BDI. …the BDI urges Berlin to cut the overall tax burden, including corporate and trade levies, to a maximum 25 percent, compared to 26 percent in the US. …tax competition has clearly heated up within the European Union: France plans to reduce its top corporate rate to 25 percent by 2022 from 34 percent. The UK wants to cut its rate to 17 percent by 2021 from 20 percent today. If it fails to take action, Germany will be stuck with the heaviest corporate tax burden among industrialized countries.

Now let’s peruse a recent study from the International Monetary Fund.

Tax competition and declining corporate income tax (CIT) rates are not new phenomena. However, over the past 30 years, the United States has been an outlier in not reducing tax rates Combined with the worldwide system of taxation, this is widely regarded as having served as an anchor to world CIT rates. Now the United States has cut its rate by 14 percentage points to 26 percent (21 percent excluding state taxes), which is close to the OECD member average of 24 percent (Figure 1). Combined with the (partial) shift toward territoriality, this may intensify tax competition. …Given the combination of highly mobile capital and source-based corporate income taxation, pressures on tax systems are not surprising. …The most clear-cut, and possibly largest, spillovers are still likely to be caused by the cut in the tax rate. …Depending on parameter assumptions, we find that reform will lead to average revenue losses of between 1.5 and 13.5 percent of the MNE tax base. …The paper has also discussed the likely policy reactions of other countries. …tax rates elsewhere also fall (by on average around 4 percentage points based on tentative estimates).

And here’s the chart from the IMF report that sends a thrill up my leg.

As you can see, corporate tax rates have plunged by half since 1980.

And the reason this fills me with joy is two-fold. First, we get more growth, more jobs, and higher wages when corporate rates fall.

Second, I’m delighted because I know politicians hate to lower tax rates. Indeed, they’ve tasked the OECD with trying to block corporate tax competition (fortunately the bureaucrats haven’t been very successful).

And I could add a third reason. The IMF confesses that we have even more evidence of the Laffer Curve.

So far, despite falling tax rates, CIT revenues have held up relatively well.

Game, set, match.

I’m very irked by what Trump is doing on trade, government spending, and cronyism, but I give credit where credit is due. I suspect none of the other Republicans who ran in 2016 would have brought the federal corporate tax rate all the way down to 21 percent. And I’m immensely enjoying how politicians in other nations feel pressure to do likewise.

Read Full Post »

Older Posts »

%d bloggers like this: