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Corporate Tax Cuts Widen Gap With U.S.

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09/13/2017 | 03:15pm CET
By Paul Hannon 

Governments around the world have continued to cut their tax rates on company profits, lowering them further below that of the U.S. as the Organisation for Economic Cooperation and Development warned the competition to aid businesses may be going too far.

In its annual review of changes to tax policies, the Paris-based think tank for rich countries said continuing reductions in corporate tax rates had lowered the average across its 35 members to 24.7% in 2016 from 32.2% in 2000.

The U.S. corporate tax rate of 35% is the highest among major developed countries, and companies say it distorts economic decisions and discourages investments in the U.S. Many companies don't pay that full rate because of tax breaks created by Congress to encourage certain activities and because they are earning and booking profits in low-tax foreign countries.

U.S. President Donald Trump has set lowering that tax rate as one of his top priorities, although it isn't clear how far the reduction will go given that each percentage point reduces corporate-tax revenue by about $100 billion over a decade.

The OECD said Japan has undertaken one of the most aggressive reductions over the past decade, lowering its tax rate by around 10 percentage points. Three other countries also lowered their rates last year, while 11 are set to do so this year.

The Paris-based think tank has long championed reductions in corporate tax rates as a way to boost growth, but now worries they may go too far.

"An increase in corporate tax rate competition...raises challenging questions for governments seeking to strike the right balance between maintaining a competitive tax system and ensuring they continue to raise the revenues necessary to fund vital public services, social programmes and infrastructure," the OECD said.

The think tank said that while revenues from corporate taxes across its membership rose to 2.9% of economic output in 2015--the most recent year for which complete figures are available--they remained well below the 3.6% recorded in 2007, as the financial crisis loomed.

The OECD's figures show that despite a high tax rate, the U.S. doesn't raise a particularly large amount of revenue from businesses. At 2.19% of its gross domestic product in 2015, corporate tax revenue was below the OECD average.

Indeed, compared with other OECD members, the U.S. continued to be a relatively low-tax economy. In 2015, only Chile, Mexico, Ireland and South Korea collected fewer taxes relative to the size of their economies. At 46.5% of economic output, the Danish government's tax take was the highest, well above the 26.4% collected by the U.S. government.

Write to Paul Hannon at [email protected]

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