I’m a big advocate of lower tax rates on businesses, so this chart warms my heart.
It’s evidence that tax competition in recent decades has forced greedy politicians to enact better tax policy.
The above chart comes from Chapter 3 of the International Monetary Fund’s World Economic Outlook.
And that chapter starts with some decent analysis. I especially like the empirical estimates showing the virtuous impact of lower tax rates.
…with fiscal space narrowing and spending needs remaining elevated in many economies, governments are increasingly seeking durable sources of revenue while avoiding measures that could undermine investment, productivity, and growth. As a result, understanding the trade-offs and cross-border implications of corporate income tax policy is more important than ever. …Governments continue to respond strategically to one another’s corporate income tax policies: a 1 percentage point reduction in the average peer country’s statutory corporate income tax rate is associated with a 0.4 percentage point cut in the home country’s rate. …A 1 percentage point increase in a country’s corporate income tax rate relative to rates elsewhere is associated with a cumulative decline in FDI inflows of about 0.5 percent of GDP over three years. …Lower corporate income tax rates can stimulate investment, innovation, and productive capacity.
Unfortunately (though not surprisingly given the IMF’s dodgy track record), the chapter proceeds to argue against lower corporate tax rates.
Some of the arguments are reasonable (I agree it is much better to have tax cuts matched with spending restraint), but I was dismayed to see that the IMF seems to think lower tax rates are bad because they will attract capital from nations that maintain higher tax rates.
I’m not joking. Here are some more excerpts.
Debt-financed tax cuts can generate negative spillovers in the short term by raising global interest rates and crowding out investment elsewhere. Domestically, tax cuts that come at the cost of public investment can adversely impact output in the long term… Tax competition and base shifting can reduce global efficiency. At the domestic level, they can weaken revenue collection, distort the allocation of capital across the private and public sectors… At the global level, they can cause capital and profits to move toward low-tax jurisdictions…corporate income tax changes in one economy can also pull investment and profits away from other economies… The evidence points to a clear contrast. Corporate income tax cuts in major economies are associated with lower output and investment abroad. Output in the rest of the world falls by as much as 0.5 percent two years after a corporate income tax cut.
I don’t like the first few sentences, in part because of hypocrisy (how often does the IMF complain about debt-financed spending increases?).
I also object to the fantasy assertion that tax cuts are bad because governments would otherwise use money for productive “public investment.”
But the part that really galled me was the IMF arguing that it’s a bad idea for a country to lower tax rates because that will attract capital from nations that maintain high tax rates.
Here’s a chart from the chapter. It estimates how the higher-tax nation loses when another nation lowers its corporate tax rate.
To understand why the IMF’s analysis is so bizarre, imagine if you heard someone complaining that Shell shouldn’t lower gas prices because it would hurt ExxonMobil’s profits? Or having someone tell you that Costco shouldn’t charge low prices because that means reduced profits for other grocery chains?
At the risk of being sensible, if a country is losing investment and growth because a neighboring country lowered tax rates, the proper response is to enact similar (or even larger) reductions in tax rates.
