A Place to Stand

The reason for Ireland's quite explicable economic "miracle" is known to be their cut of corporation tax & cutting of regulation, particularly building regulations. Here is Wikipedia's listing of corporation tax around the world:

Country/Corporate Rate
Algeria 30%+3%
Angola 35%
Argentina 35%
Australia 30%
Austria 25%
Azerbaijan 22%
Bangladesh 0-40%
Barbados 40%
Belarus 24%
Belgium 33.99%
Benin 35%
Bosnia and Herzegovina 10%
Botswana 15% (plus 10% surcharge)
Brazil 34%
Bulgaria 10%
Burkina Faso 10-45%
Burundi 35%
Cameroon 38.5%
Canada 29.5-35.5%
Chile 17%
China 25%
Colombia 35%
Croatia 20%
Cuba 30%
Cyprus 10%
Czech Republic 21%
Denmark 25%
Egypt 20%
El Salvador 25%
Estonia 21%
Finland 26%
France 33.33%
Gabon 35%
Germany 29.8%
Georgia 15%
Gibraltar 33%
Greece 22/25%
Guatemala 31%
Guyana 35%/45%
Hong Kong 16.5%
Hungary 16%
Iceland 18/26%
India 30-40%
Indonesia 28%
Iran 25%
Ireland 12.5%
Israel 27%
Italy 31.4%
Jamaica 33.3%
Japan 30%
Jordan 15/25/35%
Kazakhstan 20%
South Korea 13/25%
Latvia 15%
Lebanon 15/4-21%
Lithuania 20%
Luxembourg 29.63%
Malaysia 26%
Malta 35%
Mexico 28%
Monaco 33.33%
Montenegro 9%
Morocco 35%
Netherlands 20/25.5%
New Zealand 30%
Norway 28%
Pakistan 35%
Panama 30%
Peru 27%
Philippines 35%
Poland 19%
Portugal 12.5-27.5%
Romania 16%
Russia 20%
Saudi Arabia 20%-85%
Senegal 33%
Serbia 10%
Singapore 18%
Slovakia 19%
Slovenia 22%
South Africa 28%
Spain 25-30%
Sweden 26.3%
Switzerland[2] 13-25%
Syria 10-45%
Taiwan/Republic of China 25%
Tanzania 30%
Thailand 30%
Tunisia 30%
Turkey 20%
Ukraine 25%
United Kingdom 21-28%
United States 15-39%
US CT is slightly weirder than appears since the ultimate federal rate is 35%, the 39% & 38% rates being sandwiched between other lots but also there are state rates of 0-10.75%. That can add an average of 5% to the federal US rate making it 40%.
Uruguay 30%
Uzbekistan 12%
Venezuela 15/22/34%
Vietnam 28%
Zambia 35%

Now a lot of these are not closely comparable since the various bands will vary a lot. Nonetheless we have a clear trend. Average looks around the mid 20s slightly lower than Britain is. Countries under 20% are Bosnia, Botswana, Bulgaria, Chile, Cyrus, Georgia, Hong Kong, Hungary, Ireland, Latvia, Montenegro, Poland, Rumania, Serbia, Singapore, Slovakia & Uzbekistan. Most of these, at least the stable ones are growing well, even if often from a low base. Countries above 35% are Bangladesh, Barbados, Burkina Faso, Cameroon, Canada, Guyana, India, Saudi Arabia & the USA of whom India is the spectacularly fast growing exception.

So not a simple & absolute rule that cutting CT solves all growth ills but a clear trend.

There is a relationship between tax rates generally & growth "one percentage point increase in tax burden is associated with ... future five-year growth rates are estimated to be lower by 1.56 percent" which is 0.31% less per year.

Since CT is the particular tax that most closely affects business investment it should have a disproportionate effect compared to cutting taxes on other areas, even though it is a small portion of total taxes (9% in the UK). The Irish cut of 20% (from 32% to 12.5%) has led to growth going from British rates to 7% on average which implies a 4% cut in CT would roughly relate to a 1% increase in growth. Ireland also cut building regulations & some other taxes but on the other hand at the time it was in zero growth rather than matching the UK's. I think we can be confident of at least a 5-1 relationship between CT & growth.

On that basis cutting Britain's 28% CT to Ireland's 12.5% would increase our growth rate by at least 3% a year. Cutting the USA's 40% to the same should produce an least an extra 5.5% annual growth. To draw out the example that means that that reform alone will double the expected wealth of everybody in Britain from what it would have been in 23 years & in the USA in 12.7.

I must admit before researching this I still held some belief in the USA being a beacon of free enterprise/run by bloated capitalists according to preference. Clearly with one of the highest Corporation Tax rates in the world that is not so, and they lose heavily because of it.

Assuming a relationship between CT & investment that (1) people invest in proportion to the returns they expect, (2) most dividends get reinvested & (3) most reinvested dividends get reinvested we should expect the long term investment rate to be the cube of the non-taxed portion of money theoretically available. In the UK (1-0.28^3) that is 37%, for Ireland it is 67% & in the USA investment is 22.7%. International investment, where investors have a wide choice of where to invest will probably have a considerably wider diveregence in where they choose to invest than that.

Labels: economics, Fixing the economy