Trends in OECD corporate income tax rates

From the OECD's Tax Database (Table II.1):

The last few decades has seen extensive work documenting the deleterious effects of corporate income taxes - especially for small open economies. These lessons seem to have been taken to heart by policy-makers.

Comments

[hix]

Thats it, they learned the lessons from all those oecd right winger studies!

Erm no, those countries just gave up the fight against tax evasion.

[Andrew F]

I thought Canada was going to have the lowest corporate taxes in the OECD. Looks like there is more work to be done.

[Erin Weir]

It was lowest in the G7. Now it’s lowest in the OECD? Maxime Bernier, whose op-ed Stephen was lauding on Twitter, wants zero.

There is always “more work to be done” when you keep moving the goalposts.

[Kosta]

While I accept the logic of the need to have a competitive corporate tax rate, it seems that the past 30 years has become a collective race to the bottom for corporate taxes. This inevitably shifts the tax burden to consumption and personal income taxes. The progressive in me agrees with Ignatieff and Layton in their desire to increase (or actually not decrease) corporate taxes, although that's probably not a wise idea for a small open economy.

To go along with my wish for a global bailout fund for banks, I think it would be a good idea is the OECD nations got together and agreed on a minimum corporate tax rate to halt this race for the bottom that's gone on the for the last 30 years. It's unlikely, but the prevention of corporate tax havens would be helpful.

[Andrew F]

Is it a race to the bottom? Seems like there is some intrinsic benefit in lower corporate taxes, not just a competitive benefit.

[Erin Weir]

But is there an intrinsic benefit to having no corporate tax? Maxime Bernier might think so. Other tax-cutters, such as Jack Mintz, ostensibly acknowledge good reasons to levy some corporate tax.

For example, without a corporate tax, individuals could indefinitely defer paying any tax on income by keeping it inside a corporate structure. (This point actually argues for a corporate tax rate equal to the top personal income tax rate, with a tax credit for dividends. Canada had approximately such a regime until 2000.)

If some level of corporate tax is desirable, then it would make sense for international organizations like the OECD to set a floor. Otherwise, international competition could well depress corporate taxes to sub-optimal levels. Indeed, I think that it already has in many countries.

[Stephen Gordon]

In the reading list, there's a paper by Richard Bird with the title "Why tax corporations? that suggests that the optimal CIT rate is almost certainly strictly positive.

But the fact that there is a lower bound doesn't mean that that we're at it.

[Mike Moffatt]

"In the reading list, there's a paper by Richard Bird with the title "Why tax corporations? that suggests that the optimal CIT rate is almost certainly strictly positive."

So long as personal income is *also* being taxed. If not, then the optimal rate, is, in fact, zero.

[Kosta]

There's defintely a race to the bottom as countries gain a competitive advantage by having a lower corporate tax rate -- I think Ireland is a great example of a country benefitting from having a lower corporate tax rate than its neighbors.

But there's also a benefit from a country having its tax burden diversrified amongst coporate, personal and consumption taxes. Corporate taxes with loss carry forward provisions provide a counter-cycle tax policy, with the effective corporate rate falling after economic downturns and rising during boom times. From a policy perspective, this is an easy and automatic way to stimulate the economy during recoveries and to slow it as it overheats.

Maybe I am biased because I pay personal income taxes, but I wonder if corporate income taxes are a more progressive way to tax, than pure personal income taxes (whatever progressive may mean). But I'll read Richard Bird's paper before making any more ill-informed comments, thanks for the pointer Stephen.

[Patrick]

Kosta: "... Race to the bottom ... This inevitably shifts the tax burden to consumption and personal income taxes"

The literature seems to be saying that this is the wrong way to think of it.

It seems to me that a very simplified way to think of this is: corporations are, for the purposes of this discussion, flow through entities. Think of revenue as flowing in, and wages, dividends, cap ex, taxes etc as flowing out. If you increase the rate of flow in one of the outbound 'pipes' without increasing the inbound flow, then you necessarily decrease the other outbound flows. And it seems that management prefers to decrease the flow in the wages pipe to compensate for increases in the the outbound flow in the taxes pipe.

[Andrew F]

Erin:

"For example, without a corporate tax, individuals could indefinitely defer paying any tax on income by keeping it inside a corporate structure. (This point actually argues for a corporate tax rate equal to the top personal income tax rate, with a tax credit for dividends. Canada had approximately such a regime until 2000.)"

I suppose we could resolve this by making dividends tax deductible for corporate tax purposes and levying a corporate tax on retained earnings equal to the highest marginal rate. This provides incentive to dividend out the firm's income each year, to be taxed at whatever marginal rate applies for each shareholder. We can then eliminate the personal dividend tax credit. To keep capital ratios up, firms will need to issue new common shares, and I'd see them likely doing so through DRIPs.

Foreign shareholders would see no effective tax on investment by Canada, and will be taxed by their home government. Canadian investors will be taxed at their marginal rate, as is the case now (at least sort of; I'm neglecting corporations buying back shares for capital gains).

[spencer]

This chart compares statutory rates where, for example the US rate is 39% even though the effective rate for the US is around 21%.

Comparing statutory tax rates is pure junk economics comparable to looking under the street light for the car keys you lost in the parking lot.

[Bob Smith]

Andrew, Erin,

Canada already has effective mechanisms in place to deter deferal of income at the corporate level. Investment income (other than dividends) earned by corporations is generally taxes in the corporation at (or about) the top marginal rate due to a refundable tax over and above the regular corporate tax. The tax is refunded when corporation pays dividends. Similarly, dividend income, which is typically not taxable in a corporation, is subject to a special refundable tax when it is paid in respect of portfolio investments. Again, this tax is refundable when the corporation pays dividends to its shareholders.

True, these rules only apply to investment income, and not income from active businesses. But, query whether it's really all that desirable to require companies to either distribute all their earnings to shareholders every year or pay tax at the top marginal rates (which is likely to be far in excess of the average tax rate of their shareholders - especially since some of the biggest players in Canada's capital market are non-taxables like pension funds). Yes, firms can raise capital by issuing new shares or borrowing, but issuing new shares is expensive and capital (either through share issuance or borrowing) isn't always available (see 2009. Retained earnings are often an important source of capital for companies (especially small and medium sized companies)

[Kosta]

Patrick, you're right that corporations can (should?) be viewed as conduits for profits to shareholders, and that taxes could be applied at a personal level, rather than at the corporate level. But I do think the "race to the bottom" phrase is applicable. There are some benefits to corporate income taxes; the Richard Bird paper Stephen pointed out lists some of them. The countercyclical effects of loss-carry-forward provisions is another benefit, providing an automatic stabilizer for the economy. But by having countries compete in having the lowest CIT to attract multinationals, these benefits are eroded. For instance, Ireland has lower CIT's than other nations, and lower than Canada in particular. For the next couple of years, Canadian CIT receipts will be substantially lower because of the loss-carry-forward provisions, but these provisions will be stimulatory to the economy (and will be stimulatory without the gov't choosing winners and losers). Ireland's economy will not receive the same benefit, as corporate tax base starts from a lower level. I wonder if this effect will be noticed, given the totality of Ireland's challenges.

On another note, there's an additional benefit of cutting corporate income taxes. Reducing such taxes discourages the use of debt in corporations. If CIT is cut, then the tax advantage of not paying taxes on the interest from debt is lost, and corporations will be more likely to choose equity sources of capital. Less debt means less leverage, which would ony add to the stability of the financial system.