The hopeless race to the bottom
This is how global corporate income tax rates have developed over the course of the past plus twenty years: a clear downward trend. Some would say: “it’s a race to the bottom” others would say it doesn’t matter because the actual amount of money that gets paid in corporate income tax has remained more or less the same. This statement, however, fails to acknowledge the fact that more than half the financial transactions in the world take part internally in corporations between connected corporate parties. Moreover, corporates have a much large part of the societal cake so to speak than they used to, and inequality is on the rise. I would therefore claim that this is an unhealthy trend and the consequences are potentially detrimental to especially developing countries.
International #TaxJustice Blog Action Day
Today is international #TaxJustice Blog Action Day – A day on which we, a number of CSOs across Europe working on tax issues want to draw as much attention as possible to tax dodging, harmful tax competition and incentive, tax havens etc. and tax issues in general. That’s why we are blogging, and we’re being joined by others interested in/ working with/ experts on tax.
So, please do join the action and raise your voice for #TaxJustice!
In principle I would have thought that corporate income tax would be a tax companies would find quite fair as it is a tax on their profit. So, if they do not make a profit they don’t pay tax. But this doesn’t seem to be the case. The question they might ask is: “why should a company share its profits that it has worked hard to make?” Others might argue that corporate income tax is of little importance. However, I would argue that corporate income tax has a lot of merit. In many developing countries corporate income tax makes up a very substantial part of their domestic revenue. But with dwindling tax rates the revenue generated dwindles too leaving less money for governments to spend on public services, such as health, education and infrastructure – which everyone including most multinational companies use.
As the graph above clearly depicts corporate income tax rates have fallen from somewhere between 32% and 53% in 1993 to close to 18 to 28% in 2016. But the world is becoming more and more unequal and the need for financing development has not declined, it therefore seems illogic that countries are lowering their corporate income tax rates. So why is this? Countries have been told for many years that low corporate income tax rates attract much sought after foreign direct investments. And there has been a firm belief that companies would seek to invest in low tax jurisdictions. This has led to countries competing to offer lower or at least as low rates as their neighbouring countries which has led to a race to the bottom. Though with the recent case against Apple, trying to bring your taxes way down below everyone else’s might not be such a good idea.
So, what could the solution be? A global minimum corporate income tax, in order to curb harmful competition between countries? Or is a global minimum corporate income tax rate a completely utopian idea? Numerous economists, including economists such as Joseph Stiglitz, Edmund Fitzgerald and Manuel F. Montes have actually already suggested countries agree a global minimum corporate income tax as a means to curb tax competition and tax avoidance.
I believe a minimum corporate tax rate has the potential to curb tax competition, but the next question which requires a lot of debate is what should the rate be? And should there be different levels for rich and poor countries to make poorer countries more attractive to foreign investors?
My plea to decision makers globally is therefore: to take the tendency we are seeing with for example corporate seriously. We need global agreements to curb this race to the bottom.
This project is funded by the European Union.