Three cheers for the decline of the corporate income tax

Some observers have called for international co-operation to protect the corporate income tax from global competitive pressures. These calls should be rejected, says Alan D. Viard, a resident scholar at the American Enterprise Institute (AEI).

The corporate income tax causes needless distortions by penalising saving for the future and penalising particular kinds of financial securities issued by particular kinds of firms. Rather than colluding to maintain the corporate income tax, countries should switch to better-designed revenue sources, say Viard.

For example:

The average corporate tax rate charged by governments had fallen from 38 to 27 per cent from 1992 to 2006, according to a survey by KPMG

From 1995 to 2004, 49 countries reduced rates while only 11 increased them, finds the AEI International Tax Database.

A May 2006 European Union (EU) report found that 22 of the 25 European Union (EU) countries had reduced their statutory rates between 1995 and 2004.

Competitive pressures have clearly played a major role in pushing down corporate tax rates. But the downward trend in corporate tax reductions has not been greeted warmly in all circles, says Viard:

In May 2004 French and German officials urged the European Union (EU) to set a minimum corporate tax rate for all members, but they were unable to secure the support required for adoption

Former treasury secretary Lawrence Summers embraced this viewpoint in a December 18, 2007, speech, in which he advocated international cooperation and tax harmonisation.

These proposals assume that the corporate income tax would otherwise be a good revenue source and that its only problem is its vulnerability to global competition. But that is not the case. Despite appearances to the contrary, the corporate tax would not be an effective way to raise revenue and it would burden workers, even if firms could not move across international boundaries, says Viard.

Source: Alan D. Viard, Three Cheers for the Decline of the Corporate Income Tax. American Enterprise Institute, April 8, 2008.

For text: http://www.aei.org/publications/pubID.27770/pub_detail.asp

For more on Taxes: http://www.ncpa.org/sub/dpd/index.php?Article_Category=20

FMF Policy Bulletin/ 22 April 2008