OECD Corporate Tax Rates: Does Size Matter?
Advocates of corporate tax cuts like comparing Canada to an unweighted average of Organisation for Economic Co-operation and Development members. Since the OECD keeps admitting more microscopic economies with very low corporate tax rates, this average keeps falling regardless of whether any country actually lowers its rate.
Last year’s admission of Estonia, Israel and Slovenia dragged the OECD average just below 26%. The implication is that Canada must implement all scheduled corporate tax cuts just to keep up with the Joneses.
The fact that tiny economies have low corporate tax rates may be more than a coincidence. The optimal corporate tax rate could plausibly depend on economic size. A big economy can easily tax the profits of businesses that need to be there to serve its large market and use its extensive supply of inputs.
A small economy will be more vulnerable to tax competition: the threat of businesses relocating elsewhere in pursuit of lower taxes. Ranking OECD members by Gross Domestic Product, as I have done in the following table, seems consistent with this hypothesis.
A dubious model afflicting policy discourse is Canada as the quintessential “small open economy.” In fact, Canada has a pretty big economy. We just feel small compared to the United States.
Relative to other OECD members of similar economic size, Canada’s combined federal-provincial corporate tax rate was already quite competitive in 2010, before the federal and provincial corporate tax cuts being implemented this year and over the next couple of years. The House of Commons recently called for just the federal rate to be restored to its 2010 level.
In comparing Canada with the entire OECD, let’s recognize that the United States is a more important competitor than Iceland. If opportunities for business investment are roughly proportional to economic size, then countries should be weighted by Gross Domestic Product. Doing so indicates an OECD average corporate tax rate of 33% in 2010.
Japan is cutting its corporate tax rate to 35%, which will lower this weighted average to 32%. In any case, Canada has room to raise its corporate tax rate while remaining competitive with other advanced economies.
OECD Corporate Tax Rates and GDP
(GDP = expenditure approach, US$ billions, purchasing power parity)
|
United States |
$14,044 |
39.2 % |
|
Japan |
$4,135 |
39.5 % |
|
Germany |
$2,975 |
30.2 % |
|
France |
$2,173 |
34.4 % |
|
United Kingdom |
$2,173 |
28.0 % |
|
Italy |
$1,953 |
27.5 % |
|
Mexico |
$1,540 |
30.0 % |
|
Spain |
$1,481 |
30.0 % |
|
Korea |
$1,321 |
24.2 % |
|
Canada |
$1,276 |
29.5 % |
|
Turkey |
$1,024 |
20.0 % |
|
Australia |
$Â 877 |
30.0 % |
|
Poland |
$Â 722 |
19.0 % |
|
Netherlands |
$Â 675 |
25.5 % |
|
Belgium |
$Â 392 |
34.0 % |
|
Switzerland |
$Â 350 |
21.2 % |
|
Sweden |
$Â 346 |
26.3 % |
|
Greece |
$Â 328 |
24.0 % |
|
Austria |
$Â 325 |
25.0 % |
|
Norway |
$Â 269 |
28.0 % |
|
Czech Republic |
$Â 268 |
19.0 % |
|
Portugal |
$Â 266 |
26.5 % |
|
Chile |
$Â 243 |
17.0 % |
|
Denmark |
$Â 208 |
25.0 % |
|
Israel |
$Â 206 |
25.0 % |
|
Hungary |
$Â 203 |
19.0 % |
|
Finland |
$Â 188 |
26.0 % |
|
Ireland |
$Â 177 |
12.5 % |
|
New Zealand |
$Â 125 |
30.0 % |
|
Slovak Republic |
$Â 124 |
19.0 % |
|
Slovenia |
$Â 56 |
20.0 % |
|
Luxembourg |
$Â 42 |
28.6 % |
|
Estonia |
$Â 27 |
21.0 % |
|
Iceland |
$Â 12 |
18.0 % |
Once again, you’ve clearly identified that Canada’s race to the bottom is a dangerous game.
At least 6 of the countries that have a lower CIT than Canada have already suffered through substantial economic duress and many others are barely holding on.
Italy, Portugal, Ireland, Iceland, Greece and the UK have all gone through a process of ‘austerity’.
Many others seem so small. It seems ridiculous to compare ourselves to their economic situation.
I am surprised Israel is so high. You have to think between security costs and the basic shortage of resources like water they would have a much lower CIT rate. If they can do 25% surely we can 30%.
And we were doing 30% last year. I expect a more ambitious proposal from you, Travis.
lesson 1 – there is a high correlation between corporate tax rate and productivity.
Hence, my high value adding/high productivity arguement.
However, simplicity is not something I cater to and therefore corporate tax cuts must become the center of a very large public debate, it is within these debates that the truth the mathematics will come out, and penetrate the cultural space that it needs to with the average voter. How do we share in the pain from the great recession. Canada is no different, we have suffered and in the post recession, it is the message that must be hammered home with voters- workers and citizens did not create the recession, and therefore across the board tax cuts to corporations is the most wrong headed policy a government could enact.
There are so many other more superior ways to grow jobs, and the citizens of this country deserve a whole lot more policy response.
How does 50 % of your profits or 100% of assets sound?
Even if we weren’t already comfortably within the weighted OECD average, aren’t international corporate tax rates fundamentally a coordination problem?
Don’t appeals to the average, while a reasonable response to the push for further cuts, just beg the question of what the average ought to be?
Have there ever been efforts to try to coordinate on this issue at the international level?
Although I can see that weighting them is more meaningful than a straight mean, I still have problems.
1) I think it’s still much more complex; against whom do we actually compete (so, Mexico ought to be more highly “weighted” than Italy, for example)
2) Isn’t there a common claim in the US that although their rate is that high, no one ever, ever, ever pays that rate?
Erin, your presentation is compelling. You’ve convinced me that the business world can afford a tax increase. …but why should I care?
Why should I want the government revenues to increase? Why should I want to see anyone’s taxes increase?
Consider my pedestrian perspective, Erin. To me, taxes are the money that’s subtracted from my income and money that’s added to my expenses.
Will other people’s increased taxes help me?
Alex, it is indeed an international coordination problem. The solution would be a treaty setting a minimum corporate tax rate, which might also require common definitions of the tax base.
By taxing American corporations on a worldwide basis, the US attempts to apply such minimum standards to its own corporations regardless of where they operate. One can imagine the European Union harmonizing its corporate tax rates and bases. However, we are nowhere near a comprehensive global solution.
Jesse, I agree that additional weight should be given to the United States and Mexico. Doing so would strengthen my argument that Canada has room to raise its corporate tax rate while staying competitive.
In all countries, tax deductions mean that most corporations actually pay less than the statutory rate. The US probably has more deductions than most countries. While many American tax loopholes are indefensible, I think Canada should emulate the American model of greater depreciation, etc. for actual investments instead of across-the-board rate reductions.
George, I acknowledge my premise is that the public sector needs more revenue. Even if you do not want additional spending, additional revenue could be used to reduce the deficit. Other people’s increased taxes will help you when you get to use better public infrastructure and services.
The lack of coordination on CITs is a feature not a bug of globalization.
I guess size does not matter, but politics definitely do.
Seems like the NDP have pulled out of the debate.
A few lame polls and what, lets keep these tories in for another year? Not sure ai can actually swallow that decision. Looking at the list of demands to pull the tax off the table, I will say this- unless there are substantive changes made in the NDP areas, it is the wrong way to go.
An election is winnable.
Time to throw these tories from power, the NDP have got to stop the pandering of Canadian society. A few issues here and there surely do not make up for the grand hammer that the tories keep pounding our social, economic and environment.
Bad move, nothing like alienating the base.
I think Erin’s mention of inputs is interesting. Surely Canada has some elbow room for raising taxes on natural resource exports in a world of dwindling supplies. Theoretically the world should not run out of oil or gas if prices reflect increasing scarcity.
But Canada’s economy is not as large as the USA’s, Italy’s or Japan’s. In 2005 Canada’s economy regressed to that of hewer and drawer status. Our’s is not a very competitive economy outside of resource exports.
Mel Hurtig’s research for his book Vanishing Country showed that overall federal tax revenues in Canada were below the OECD average in 2004 or so. Surely there is room for improvement. Do we really need to rely on just raising CIT to pay for the good things? I agree with Erin, small economies are probably more vulnerable to CIT competition. But Canada’s is not a true G8 economy in certain ways at the same time with resource extraction and exports being a large part of it.