Friday, May 04, 2012
The Sunday New York Times described Apple’s successful efforts to reduce its U.S. and California corporate tax burdens. The article hints that the situation is a moral outrage, and it includes sob stories of governments that are supposedly hurting because they don’t raise enough tax revenues from businesses.
More importantly, the story provides further evidence
that corporate profits, investment capital, intellectual property, and reported
income are highly mobile in the global economy. Dan Mitchell and I examined
these issues at length in Global Tax Revolution.
What should the United States do about the new global
reality of footloose corporations? The obvious answer that we discuss in the
book is to chop our uniquely high statutory corporate tax rate of 40 percent,
which is now the highest in the world.
The NYT reporters did not mention that reform option,
perhaps because they focused so much on the fear of governments losing
revenues. But I have good news for the NYT reporters! We could chop our
corporate tax rate substantially, and as corporate tax avoidance fell and
investment rose, the government would probably not lose any money — it may even
raise some. Governments, businesses, and the broader economy could all be
winners from a corporate tax rate cut.
Here’s some evidence. For 19 OECD countries with good
data back to the 1960s, I plotted the average corporate tax rate and the
average corporate tax revenues raised by those countries. The chart illustrates
the Laffer Curve effect of chopping high statutory tax rates on a mobile tax
base.
The chart shows that between the mid-1960s and the
mid-1980s, many advanced economies had corporate tax rates of 40 percent or
higher. Governments collected about 2.5 percent of GDP from corporate taxes
during those years.
Then came the Thatcher-Reagan tax-cutting revolution, and
corporate tax rates began falling everywhere. They kept on falling during the
1990s and 2000s. From 1985 to 2010, the average rate for the sample of 19
countries was cut from 45 percent to 26 percent.
With that huge rate cut, governments are collecting less
corporate tax revenues, right? Not at all.
Revenues soared during the 1990s and 2000s. More recently, revenues have
dropped off due to the recession and economic stagnation in many countries.
However, it is amazing that even with the depth of the
recent economic crisis, average corporate tax revenues are still higher than
they were prior to the beginning of the rate-cutting revolution of the 1980s.
Data Notes:
• OECD corporate tax
revenue data is here. For three countries with missing 2010 data, I proxied the
values with the 2009 figures.
• OECD corporate
tax rate data back to 1981 is available here. I have used the central
government rates only because I have not found a good source for subnational
corporate rates for years prior to this OECD data.
• For this reason,
the revenues (which include subnational governments) and the rates (which
don’t) are not an exact match, but that’s not a big problem for the purpose of
showing the rate/revenue trends over time.
• The 19 countries
represented in chart are Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, Netherlands, New
Zealand, Spain, Sweden, United Kingdom, and the United States.
For further discussion and background on the data, seehere.
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