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Friday, 21st September 2007

The High-Tax Handicap: How the World’s Major Economies Shoot Themselves in the Foot with High Corporate Income Tax Rates

The High-Tax Handicap: How the World’s Major Economies Shoot Themselves in the Foot with High Corporate Income Tax Rates (PDF; 88 KB)
Source: C.D. Howe Institute

Many of the world's largest economies have a common malady handicapping their abilities to generate jobs and government revenues. From the United States, Germany and Japan, to other engines of the global economy, they tend to have high corporate income tax rates that blunt their competitiveness, making it harder for manufacturing and service businesses to adopt better technologies that would boost workers' incomes. Except for the United Kingdom, which is committed to reducing its corporate tax rate to 28 percent in 2008, most of the world's major economies rely on corporate rates in excess of 30 percent. These high rates hurt competitiveness, because when investment moves to low-tax jurisdictions, prospects worsen for economic growth and job creation.

High rates also hurt government revenues. The evidence shows that lower corporate tax rates, on the other hand, may increase rather than reduce revenues, because governments gain revenue from an expanding tax base, as business investment and profits grow, and this helps offset the effect of a lower rate. In other words, governments shoot themselves in the foot when they set corporate income tax rates too high, hurting both competitiveness and revenues.

In this e-brief, we provide a ranking of 80 industrialized and developing countries with respect to their effective tax rates on capital for marginal investment projects undertaken by large multinational companies. We also report findings on the corporate income tax rate that maximizes government revenue.


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