Study Links Corporate Tax Cuts To Economic Growth

by Mike Godfrey, Tax-News.com, Washington

03 November 2006

Low corporate tax rates really do help to give a country a significant competitive advantage over economic rivals, and are connected with higher than average economic growth, according to the results of a long-term study of international tax rates.

The study, by KPMG International, analyses international movements in corporate tax rates in 86 countries for the past 14 years, drawing on the annual surveys the organization has conducted since 1993.

The findings point to a link between high economic growth rates in countries such as Ireland, Norway, Sweden and Denmark and favourable corporate tax regimes.

Of these countries, Ireland stands as the strongest evidence that low corporate tax rates spur economic growth. Its headline corporate tax rate has fallen in stages from 40% in 1993 to 12.5% today, giving it the lowest corporate tax rate of any developed country. At its peak, the Irish economy enjoyed annual growth rates of up to 12%.

Meanwhile, the Scandinavian countries, Norway, Sweden and Denmark, have also enjoyed high growth rates after cutting corporate tax rates and reorganizing their taxation systems in the late 1980s and early 1990s, actions which have cemented their places in the world's top ten economic growth leagues, the report observed.

Canada has also followed the trend by reducing a combined federal/provincial rate from 44.3% to 36.1% between 1993 and 2006.

The US is a significant exception to this trend, having had consistently high rates of growth despite a corporate tax rate that has remained almost static at 40%. This anomaly, according to KPMG Canada's National Leader of International Corporate Tax, Tony Swiderski, is a result of the "sheer economic power" of the US which continues to attract multinational companies regardless of the high tax rate. However, even here, the one-year tax cut on repatriated funds to 5.3% from 35% brought about by the American Jobs Creation Act of 2004 sucked in $300 billion, showing the effectiveness of tax cuts, the study noted.

But cuts in single tax rates are no longer a guaranteed way of stimulating growth in a nation's economy, the report observed. As tax competition has gathered pace in recent years, growth rates have in some countries petered out; for example, Ireland's growth has recently slowed to around 2.5% due to strong competition on tax rates and incentives for inward investment from Eastern European countries like Poland and Hungary. Governments therefore have been forced to look to other factors in their quest to attract multinational companies, such as economic and legal infrastructure.

"Governments have an opportunity to attract inward investment not just through low taxation, but through astute global marketing of the benefits of placing operations in their countries," observed Penny Woolford, Leader of KPMG's International Corporate Tax practice in Toronto.

"Strategies being pursued include market share strategies (such as enforcement of transfer pricing rules) and diversification of income (a shift in the balance between direct and indirect taxes)," she added.

KPMG also found the governments are now more willing to communicate strategic policy for collecting taxes and spending the revenues.

"By actively explaining to investors the benefits arising from their social policies, governments can make it easier for corporations to persuade shareholders and others that a particular decision was financially sensible, socially responsible and capable of producing the sustainable benefits that investors are looking for," Woolford concluded.

Recommended