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September 23, 2007

World's Major Economies Have High-Tax Handicap: C.D. Howe Institute

C.D. Howe Institute

TORONTO, September 23, 2007 -- Many of the world's largest economies have a common malady handicapping their abilities to generate jobs and government revenues, according to an e-brief released by C.D. Howe Institute. From the United States, Germany and Japan, to other engines of the global economy, they tend to have high corporate income tax rates that blunt their competitiveness, making it harder for manufacturing and service businesses to adopt better technologies that would boost workers' incomes. Except for the United Kingdom, which is committed to reducing its corporate tax rate to 28 percent in 2008, most of the world's major economies rely on corporate rates in excess of 30 percent. These high rates hurt competitiveness, because when investment moves to low-tax jurisdictions, prospects worsen for economic growth and job creation. These high tax rates also hurt government revenues, say the authors, Duanjie Chen, Jack Mintz and Andrey Tarasov.

"High rates also hurt government revenues. The evidence shows that lower corporate tax rates, on the other hand, may increase rather than reduce revenues, because governments gain revenue from an expanding tax base, as business investment and profits grow, and this helps offset the effect of a lower rate. In other words, governments shoot themselves in the foot when they set corporate income tax rates too high, hurting both competitiveness and revenues.

We find evidence, based on analysis of data for the years 2001 to 2005, that corporate income tax collections as a share of GDPwould be maximized at a corporate income tax rate of 28 percent (see Figure 1). In other words, reductions in high corporate income tax rates above 28 percent could increase rather than reduce tax revenues as business activity expands and the tax base broadens.

High tax burdens on investment hurt a given country's competitiveness, and also that of their trading partners. Large economies, like Canada, France, Germany, Japan and the United States in particular, need to reduce corporate rates, because they are far too high relative to the revenue-maximizing corporate rate. With the possibility of an economic slowdown resulting from a collapsing housing market in the United States, the harm imposed by the high effective tax rates in the largest economies is not just bad for them, but for the world economy as a whole. President Sarkozy of France, for example, has proposed a sharp reduction in the corporate rate, to 25 percent. Others, especially Japan and the United States, should follow suit..."

The C.D. Howe Institute is a national, nonpartisan, nonprofit organization that aims to improve Canadians' standard of living by fostering sound economic and social policy. || StumbleUpon reddit Facebook Google Plus Tweet This Seed This on Newsvine

Edited & Posted by the Editor | 1:26 AM | Link to this Post

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