A study commissioned by the European Economic and Social Committee (EESC) concludes that, contrary to widespread public perceptions, corporate tax revenues among OECD countries have remained stable as a proportion of GDP over the last 40 years, despite a substantial reduction in headline corporate tax rates. Reduced effective corporate tax rates have had a positive impact on investment and growth, leading in some cases to increased corporate tax revenues.
The study, The role of taxes on investment to increase jobs in the EU: an assessment of recent policy developments in the field of corporate taxes, aims to present facts and figures and to serve as a ‘useful and reliable tool’ in the discussion on taxation. This is especially important in the current situation in the EU, the authors say, where public perception of the taxation of companies, and large multinationals in particular, is ‘distorted and exploited by populists’.
The authors argue that the current discussion over the reform of the global corporate tax system should be seen as ‘a battle between countries for their share of the global corporate tax revenue’, rather than an attempt by governments collectively to increase global corporate tax revenue. It stresses the importance of considering the economic incidence of corporation tax, which ultimately falls not on the corporate entity, but on individuals, variously as shareholders, workers or consumers.
Both the OECD and IMF have identified corporate taxes as the most harmful form of taxation to growth and jobs, followed by personal income taxes, consumption taxes, and then taxes on immovable property, which are the least detrimental to growth. The IMF has noted that ‘workers, not shareholders, bear the real incidence of the corporate income tax’, with various studies suggesting the tax burden on workers of corporate tax ranges between 30% and 400%.
As corporate tax rates have converged at or below 20%, the study suggests more investments have become economically viable, resulting in higher tax revenues from wages and consumption. Corporate tax revenues are mostly in the range of 2-3% of GDP while tax revenues from wages, VAT and payroll taxes together are more than 30%.
The study cites figures from a 2005 paper showing a corporate tax rate cut of 10% can raise annual growth by 1-2%, while a paper referred to by the OECD in 2008 showed a 1% increase in the tax rate on foreign direct investment leading to a 3.7% decline in investment.
Overall, the results of the study suggest that:
OECD economies that have reduced their effective corporate tax rates in recent years have seen increases in investment in the following years, with the positive impact on investment stronger over a five-year period than a two-year period;
reductions in corporate tax rates do not appear to have led to falls in corporate tax revenue collection, with six incidences where a cut in the effective corporate tax rate in an OECD economy actually led to an increase in corporate tax revenues; and
‘tentative evidence’ that a reduction in the effective tax rate in OECD countries may lead to an increase in overall public revenue, as increased company investment boosted other tax receipts such as income tax.
The EESC is a consultative body set up under the Treaty of Rome to enable civil society organisations from the member states to express their views at European level. Its opinions are addressed to the Council, the Commission and the Parliament. The views expressed in the study are those of the authors and do not necessarily reflect the official opinion of the EESC.
See The Role of taxes on investment to increase jobs in the EU: an assessment of recent policy developments in the field of corporate taxes, by Pieter Baert, Frederik Lange and James Watson (May 2019) at europa.eu/!NB43bP.
A study commissioned by the European Economic and Social Committee (EESC) concludes that, contrary to widespread public perceptions, corporate tax revenues among OECD countries have remained stable as a proportion of GDP over the last 40 years, despite a substantial reduction in headline corporate tax rates. Reduced effective corporate tax rates have had a positive impact on investment and growth, leading in some cases to increased corporate tax revenues.
The study, The role of taxes on investment to increase jobs in the EU: an assessment of recent policy developments in the field of corporate taxes, aims to present facts and figures and to serve as a ‘useful and reliable tool’ in the discussion on taxation. This is especially important in the current situation in the EU, the authors say, where public perception of the taxation of companies, and large multinationals in particular, is ‘distorted and exploited by populists’.
The authors argue that the current discussion over the reform of the global corporate tax system should be seen as ‘a battle between countries for their share of the global corporate tax revenue’, rather than an attempt by governments collectively to increase global corporate tax revenue. It stresses the importance of considering the economic incidence of corporation tax, which ultimately falls not on the corporate entity, but on individuals, variously as shareholders, workers or consumers.
Both the OECD and IMF have identified corporate taxes as the most harmful form of taxation to growth and jobs, followed by personal income taxes, consumption taxes, and then taxes on immovable property, which are the least detrimental to growth. The IMF has noted that ‘workers, not shareholders, bear the real incidence of the corporate income tax’, with various studies suggesting the tax burden on workers of corporate tax ranges between 30% and 400%.
As corporate tax rates have converged at or below 20%, the study suggests more investments have become economically viable, resulting in higher tax revenues from wages and consumption. Corporate tax revenues are mostly in the range of 2-3% of GDP while tax revenues from wages, VAT and payroll taxes together are more than 30%.
The study cites figures from a 2005 paper showing a corporate tax rate cut of 10% can raise annual growth by 1-2%, while a paper referred to by the OECD in 2008 showed a 1% increase in the tax rate on foreign direct investment leading to a 3.7% decline in investment.
Overall, the results of the study suggest that:
OECD economies that have reduced their effective corporate tax rates in recent years have seen increases in investment in the following years, with the positive impact on investment stronger over a five-year period than a two-year period;
reductions in corporate tax rates do not appear to have led to falls in corporate tax revenue collection, with six incidences where a cut in the effective corporate tax rate in an OECD economy actually led to an increase in corporate tax revenues; and
‘tentative evidence’ that a reduction in the effective tax rate in OECD countries may lead to an increase in overall public revenue, as increased company investment boosted other tax receipts such as income tax.
The EESC is a consultative body set up under the Treaty of Rome to enable civil society organisations from the member states to express their views at European level. Its opinions are addressed to the Council, the Commission and the Parliament. The views expressed in the study are those of the authors and do not necessarily reflect the official opinion of the EESC.
See The Role of taxes on investment to increase jobs in the EU: an assessment of recent policy developments in the field of corporate taxes, by Pieter Baert, Frederik Lange and James Watson (May 2019) at europa.eu/!NB43bP.
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