Friday, January 28, 2005

Corporate Tax Rates

The Wall Street Journal reports that countries all across Europe have been slashing corporate tax rates, and the US now has higher corporate tax rates than any in the EU. Link. (requires subscription)
Following the lead of Ireland, which dropped its rates to 12.5% from 24% between 2000 and 2003, one nation after another has moved toward lower corporate rates with fewer loopholes. The Netherlands, the second most popular European target for U.S. investment, recently joined the movement, lowering its corporate rates by three percentage points to 31.5% and simplifying its tax structure.

The corporate-tax cutters of recent years stretch from Portugal, where the rate has dropped 10 points to about 27%, to Austria, down nine points to about 25%. Even Germany, which has Europe's highest rate and has bitterly opposed the plummeting tax rates elsewhere in the region, has done some dramatic trimming -- from as high as 56% six years ago, according to data from KPMG LLP, to 38.3% last year.

Germany's trims leave the standard U.S. rate -- about 40% including average state taxes -- above that of every country in Europe, according to separate studies by the Organization of Economic Cooperation and Development and KPMG.(...)

The upshot is that Europe, long known for steep and complex taxes on corporations, is more and more likely to prompt U.S. companies to expand there rather than at home, tax experts say. Shifting revenue -- and some of their operations -- to lower-tax countries is the single biggest way American companies avoid paying U.S. rates, bringing down their effective taxes.

"We are living in a global economy and we compete in a global economy, and if our corporations are competing against societies that don't tax their corporations as much, we have to consider that," says John Breaux, a former Democratic senator from Louisiana and the co-chairman of a new White House-sponsored tax-reform panel, in an interview.

A lot of politicians and commentators are obsessed with the "threat" of low-labor-cost countries, such as India and China. However, labor is only one cost of doing business, and the most attractive place to build a new plant is where the overall cost is lowest. The US has an advantage in the costs of security, corruption, and eratic law enforcement vs. many of the countries with the lowest wages, but not vs. Europe.

There is little that politicians can do to improve our wage competitiveness, but they hold absolute control over the competitiveness of our corporate taxes.


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