7. Taxes constrain growth: Attracting investment at the cost of public services
The removal of national controls on the mobility of capital appears to be the main factor driving the reduction in corporate tax rates since the 1980s.[17] Global tax “reform” over the past three decades has emphasized decreasing corporate taxes, arguing that they are a constraint on the international capital investment market. According to a World Bank report, more economies reformed their tax regimes in 2009 than in any previous year. The report recorded 171 reforms affecting taxes in 104 economies around the world. Some 45 countries reduced the tax burden on businesses, or made it easier to pay taxes. This number is 25 percent more than in the previous year. The most popular reform was to reduce profit tax rates, which occurred in 20 countries.[18] For these countries, the average reduction was 6.1 percent.
The trend of tax-cutting reforms by governments has been underway for some time. Harvard economist Rodrik observes, “There has been a remarkable reduction in corporate taxes around the world since the early 1980s. The average for the member countries of the OECD, excluding the United States, has fallen from around 50 percent in 1981 to 30 percent in 2009.”[19] Worldwide, between 2004 and 2009, high-income countries decreased their taxes by an average of 10.3%; upper middle income countries cut back by an average of 17.8%; lower middle income by 12.8%. Only low income countries did not lower their taxes.[20]
In a revealing conclusion to their recent study of corporate tax trends worldwide, the international accounting firm Ernst and Young reported, “Driving down tax costs and realizing tax savings is now a core element of transaction planning. Tax is no longer something which is considered as an enhancement after the decision to do the deal has already been taken—increasingly it is the difference between success and failure.”[21] The message to developing countries from the international corporate community is clear: if you want our investment, you better reduce our taxes.
But such tax reform does not come without costs to the societies involved, for “the international mobility of firms and capital also restricts a nation’s ability to choose the tax structure that best reflects its needs and preferences. In particular, this mobility puts downward pressure on corporate tax rates and shifts the tax burden from capital, which is internationally mobile, to labor, which is much less so.”[22] In other words, tax-cutting negotiations increase corporate profits at the cost of lower wages and unemployment. This is as true in the United States as it is abroad.
Links,
I invite readers to also read “Good Capitalism Bad Capitalism, and the economics of growth and prosperity” available at the following URL: http://www.acton.org/pub/religion-liberty/volume-17-number-4/good-capitalism-bad-capitalism-and-economics-growt
Another good source of information on the subject of capitalism and socialism is a video presentation entitled Rev. Robert A. Sirico on Socialism and Social Justice, available for viewing online at: http://vodpod.com/watch/3357265-rev-robert-a-sirico-on-socialism-and-social-justice