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Down With Corporation Tax!

Jeremy Hetherington-Gore Unleashed
22 July, 2007

The CATO Institute criticizes the US Treasury for failing to cut its high corporate tax rate, but the better question is why have corporate tax at all?

CATO quotes a recent survey by KPMG showing that the average corporate tax rate in the EU has fallen from 38% in 1996 to 24% in 2007, and that the process is continuing, there and elsewhere. Yet the US holds out with a 40% total corporate tax in most states.

As companies and their capital become more footloose during the unstoppable process of financial globalization, there is increasing pressure on countries to compete for the investment and jobs (and the income taxes) that companies bring with them. There seems to be no chance that countries will agree to hold the line at any given level, other than zero, given that many of them already have very low rates.

The lower that rates go (in some countries) the more companies based elsewhere will strain every nerve to take advantage of the lower rates, and the more absurd will seem the contortions that Treasuries go through to keep their precious revenues.

No-one calculates the cost of corporate tax collection, as far as I know, but it must be huge. The US Congress seems to spend much of its time railing against offshore, and inventing ever more restrictive laws to prevent companies from taking advantage of low tax rates on offer elsewhere. The US courts are full of corporate executives, accountants and lawyers on trial for 'abusive' tax sheltering. Across the world, legions of tax collectors battle to apply transfer pricing and CFC (Controlled Foreign Corporation) rules, with matching court structures. And there is the enormous interlocking spider's web of Double Tax Avoidance Treaties (partly aimed at personal investment, it is true) which has to be maintained and administered.

That's just on the regulatory side. In companies themselves, finance departments have tax minimization as one of their major preoccupations, and engage in an intricate dance with their auditors and the tax authorities which often ends up, again, in the courts.

In the EU, the prickly subject of State Aid is almost entirely driven by corporate tax concerns; Brussels and member states argue interminably over what is and isn't a legitimate tax break, and the European Court of Justice often has to pick up the pieces. Almost all governments world-wide set up and administer tax-privileged free-trade zones.

So the list goes on. With a universal zero rate of corporation tax the whole of this wasteful apparatus could be swept away, with a probable bonus to productivity of several percentage points.


About the Author

Jeremy Hetherington-Gore Unleashed

Jeremy tackles the difficult issues head on!


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