Wednesday, February 04, 2009

Leading Lights on Lower Corporate Taxes

Given the Derek Draper - Taxpayers Alliance smackdown (with various comrades chipping in) going on at the moment I thought it might be worth taking a closer look at a country that actually followed the TPA’s low tax prescription.

To do his I’m going to quote a 2007 report from the free market Center for Freedom and Prosperity showing how a European country transformed itself into low tax and reaped the many benefits demonstrated by a man who once drew a bell curve.

The report praised the introduction of a simple flat tax on labour income, saying:
Tax rates on labor income are modest, with only five other OECD nations imposing a top tax rate that is lower than the 36.7 percent rate

Also in for praise was the country’s corporate tax rate:
As recently as 1989, the country had a punitive 50 percent corporate tax rate. As shown in Figure 1, the government began to reduce the tax rate in the early 1990s. A series of rate reductions dropped the burden down to 33 percent. The rate was modestly reduced to 30 percent in the late 1990s, and then slashed to 18 percent in 2002

With it’s results:
Much like Ireland, the low corporate tax rate yielded positive results. Economic growth has been robust, financial markets are strong, and unemployment is almost nonexistent. Sceptics worried that the low corporate rate would deprive the government of revenue, but the corporate rate reduction generated substantial revenue feedback.

And of course then we get on to praise for assisting wealth creators with cuts to capital gains:
The low 10-percent rate in the new system sharply reduces the tax code's bias against capital. Individuals no longer are being heavily penalized for deferring consumption and providing capital to the economy. Much like the lower tax rates on corporate income and personal income, the flat-rate tax on capital income is associated with strong growth and increased competitiveness. It also is generating considerable revenue for the Treasury. Figure 4 shows how revenues have jumped in the years since the low-rate flat tax on capital income was enacted.

And then we get to the conclusion
Subsequent reforms, especially lower tax rates, have yielded big dividends. It is a rich and successful nation. Lower tax rates and supply-side policies have boosted growth, increased efficiency, and made the country more competitive. The three biggest reforms are the low corporate tax rate, the low-rate flat tax on capital income, and the intermediate-rate flat tax on labor income. There already is considerable evidence that the first two reforms have been very successful. Indeed, it is quite likely that the lower rates have generated significant Laffer Curve effects.

Sounds good, doesn't it, exactly the kind of justification for the TPA’s prescription of lower taxes. Thing is, the country's name is Iceland and here in the cold light of 2009 the picture for Iceland is not quite so rosy. In fact given that the outlook for only two European countries with a lower corporate rate (Hungary and Ireland) doesn’t look too good either. On that evidence, I think it's safe to pass on the TPA's neo-liberal prescription.

Hat tip: Richard Murphy, for the original link to the report.


CityUnslicker said...

Where is the link between low taxes and Iceland's crisis.

This is poor effort indeed. Iceland and Ireland are in deep trouble, as bad as ourselves.

But the cause is low interest rates, lax regulation of capital flows and capital adequacy within banks. As well as laxity around mortgage eldning.

All these issues are cause dby governments, not low tax rates.

I would perhaps give you a point if you had tried to say that low tax rates had brought in huge monetary flows which helped to overinflate the economy, but you did'nt so I won't.

Andreas Paterson said...

Ok, you got me, it ain't exactly the most perfect logical argument, it's more a bit of playing to the crowd with some vague correlations.

The actual link between low corporate tax and financial instability is pretty vague, it's neither here not there really.

The point is more that up until everything started to fall apart, right wingers were holding up countries like Iceland and Ireland and dynamic pioneering economies leading us to a brighter low tax future. That turned out to be bull.

Will have a crack at your other comments later, need sleep now.