Why Corporate Taxes keep falling
Countries compete with each other to hold on to corporations while tax havens laugh their way to the bank
Since 1985, the global average statutory corporate tax rate has fallen from 49% to 24%. That is a drop of over 50% in 33 years and has resulted in massive revenue losses for a number of countries, so why do nations do it?
Globalization
The most commonly accepted reason for this change has to do with the effects of globalization. Analysts are of the opinion that competitive taxing, in order to attract big businesses, has been the number one driver for the fall in the global average rates.
An obvious example of this is Ireland, where corporate tax rates are a mere 12.5%. Google, Facebook, Microsoft, Ebay, PayPal, Linkedin, etc. all have their European headquarters in Dublin.
However, a recent article published in the VoxEu journal points to another culprit when it comes why corporate tax rates have decreased so much. Drawing on a database that was gathered from public records, the study found that the profits of foreign companies in non tax haven countries are lower than that of the local companies, while on the other hand, the profits of foreign companies in tax haven countries were significantly higher than those of the local companies.
Companies go where the taxes are low
What does this tell us? To put it briefly, multinational companies simply shift their profits to countries where the tax laws are far more relaxed. It was found that for the year 2015, 40% of all multinational profits (profits earned outside the parent country) were shifted to countries that are considered to be tax havens.
The reasons as to why this is allowed to happen are a few. Firstly, enforcement agencies can not extract the tax revenue from haven countries because of a lack of information and no formal system through which to do so. Secondly, the US Tax Codes and Treasury Policies incentivize the shifting of profits.
One more reason has been theorized, but is very difficult to prove. It was found that the tax haven countries such as Bermuda actually manage to extract more corporate taxes as a proportion of their national income when compared to countries like the US.
The assertion here is that maybe countries like the US ought to further lower their corporate taxes, in order to stand a better chance of increasing their revenue. Of course the suggestion (if it is even being made), is a bit out there, but maybe Trump has a point after all.
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