And with ownership structures of private business becoming more international on a daily basis, corporate profits in the form of dividends increasingly escape national tax collection and thus contribute nothing to the spending and investments necessary to maintain and extend institutional and societal competitiveness. If tax on corporate dividends increasingly eludes national taxation, then taxing corporate profits should be the obvious place to find compensation.Corporate tax competition inevitably leads to declines in the amount of taxes paid by corporations, a loss of public revenue in many cases, particularly if economic activity is slack, and a greater burden on individuals. Since tax bases have been broadened while rates have been cut, globally the corporate tax crisis is still at bay. But there is a limit to how much corporate tax bases can be broadened. And in the OECD countries in particular, this limit is not far away. Even the broadest tax base will not matter if tax rates tend towards zero. And this might happen earlier than we think. If the linear trends in the OECD countries are extrapolated into the future, statutory corporate tax rates will hit zero by the middle of this century. The somewhat tragic irony is that the countries that have participated most actively in this downward tax competition haven’t even had the short-term gains in the form of increased foreign direct investment that motivated them to do so. The reason is simple: cutting tax to attract investment cannot work on its own and may be counterproductive. Take Ireland, often held up as a low tax success story. Yet Ireland’s inward investment and robust economic growth owe much to a strong public sector and smart use of tax spending in areas like education and infrastructure, not just to its tax cuts. It would be foolhardy to think that any country can emulate Ireland’s success by cutting taxes. In fact, given the need to build up their frameworks, they may end up damaging their prospects. Little wonder that research shows that the “new” member states of the European Union haven’t received more investments from the “old” member states in the years they have aggressively cut their corporate tax rates. Elsewhere, in G7 Canada a cut in the statutory corporate tax rate from 28% to 21% between 2000 and 2006 was followed by a decline in net inflows of FDI in the same period.Without action, we could be on the verge of a global tax crisis that could hurt economic activity. The tax burden cannot be carried by labour and consumption alone. The upshot of inaction would be a loss of revenue for governments and a downward spiral in economic activity. Governments must realise that “beggar-thy-neighbour” tax competition risks eroding their own economic and social foundations. And they must recognise that all countries have a common interest in cooperating to achieve fair levels of corporate taxation. This requires multilateral solutions.The message that tax systems enable growth and that corporations must pay their share surely makes sense to most governments. Is there any choice but to step up initiatives on harmful tax practices and discourage unfair tax rivalry? The EU has taken a first step by starting work on creating a common corporate tax base. Yet while positive in itself much further initiatives must be taken, both within and outside the EU, to address the fragility of current corporate tax practices. Political will and dedication is needed, but the public gains would be worth it. Surely that is what co-operation and development is all about.
*The views expressed in this article are those of the author and do not necessarily reflect the views of the OECD or its member countries. ITUC is a partner organisation of the Trade Union Advisory Committee to the OECD (TUAC).Visit www.ituc-csi.org and www.TUAC.org References
- ICFTU (2006), “Having their cake and eating it too - The great corporate tax break”, ICFTU Online, 6 July 2006, Brussels. See www.icftu.org
- OECD (2005), OECD in Figures, Paris.
- OECD (2005), OECD Tax Database, www.oecd.org/ctp/statistics , Paris.
©OECD Observer No. 261 May 2007