Wednesday, December 7, 2016
Around 600 years ago in England there was a war. It was between the House of Lancaster and the House of York and was called ex post facto the Wars of the Roses. It was a petty and bloody war and ended when Richard III, the last Yorkist king, was defeated by Henry Tudor founder of the house of Tudor at the battle of Bosworth in 1485. We may be in for a similar metaphorical history making period of time if the tea leaves read from Brexit, the election of Donald Trump, and with Italian voters rejecting Prime Minister Matteo Renzi’s referendum on constitutional reforms and the established world order with a “no” vote this past Sunday. If so, an ample title for this allegory could be the “War of Taxes.”
Here in America, liberals have been so caught up on raising taxes on the wealthy that they missed the picture worldwide in terms on how these policies impact not only the world transnational economics but also the common citizen. This means that tax policy has to consider global and national economic interest equally.
As it stands, Ireland with a 12.5% corporate tax rate, has one of the lowest in the world. The federal corporate tax rate in the U.S. is 35 percent. Thus using basic math, if a company constructs a factory in Ireland that produces $1 million in profit, it will pay $125,000 in Irish tax compared to $350,000 that it would pay if it built the same factory in the U.S. This is a large difference seeing that the Organization for Economic Co-operation and Development (OECD) notes that the U.S. has the highest corporate income tax rate among its 35 industrialized member nations. What does this mean? Well knowing that Ireland is in the midst of a deep recession, the last thing there economic policy needs is to run-off foreign investment.
The U.K. has a similar economic problem. But after their June 23 Brexit vote to leave the European Union, under the leadership of U.K. Prime Minister Theresa May,they are going out of their way to comfort international companies to show that the U.K. will become an even better place to do business. Although what the U.K. corporate tax policy will be (whether she would be willing to embrace a suggested cut to 15% or to cut the rate by 2020 to 17%), the British government commitment to lower corporation tax is being well received and it is certain that in the future, it will be significantly lower than current levels and would give the nation the lowest corporate-tax rate among G20 nations. Presently the U.K. corporate tax rate is 20%, which is one of the lowest in the G-20 and the same as Russia, Turkey and Saudi Arabia.
President elect Donald Trump has also expressed the importance of addressing the U.S.corporate tax rate. If we look beyond the G20 to the top 188 economic nations, the U.S.’s corporate tax rate is the third highest in the world, lower only than the United Arab Emirates’ rate of 55 percent and Puerto Rico’s rate of 39 percent, with the worldwide average corporate tax rate being 22.5 percent. Trump has proposed reducing the US federal tax from 35% to 15%. If this happens, in particular with a GOP dominated House and Senate, we may see the possibility of additional cuts in other nations. Steven Mnuchin, Trumps U.S.Treasury Secretary-nominee is already on record saying he wants to make tax reforms to increase job growth his main priority.
Before you say that Trump economic policy is impractical, be reminded that the U.S. is not the only country pushing for lower corporate tax rates. In 2015 Italy moved to lower its national corporate tax rate 24% starting in 2017 and Canada and Japan are just two of other countries currently in the process of lowering their corporate tax rates to attract new transnational businesses. Canada currently has a corporate income tax rate of 26.7 per cent. Even Japan, in an effort to promote growth just reduced its corporate tax rate to 30%. Germany along with Ireland made big cuts in an effort to attract corporate investment more than a decade ago and it has proffered effective.
All of the above may be a forewarning of what may be on the horizon – a war of corporate tax rates around the globe. This should only be expected since after losing regulatory requirements and closing tax loopholes, the only thing left to promote domestic economic growth in pragmatic terms is to reduce ones national corporate tax rate. Moreover, given that the U.S. doesn’t have a value-added tax (VAT or federal sales tax), having higher corporate tax rates will continue to serve as an impediment to economic growth domestically in terms of increased wages and jobs. It is not a requirement that we turn into a Greece before we learn the lessons of Greece. So although the War of the Roses is history, maybe 600 years from now, history books will be talking about the war of taxes.