Download Competitive Tax Policy

Competitive Tax Policy
Joel Slemrod
University of Michigan
CASIC Research Summit
April 2, 2011
What is Competitiveness?
• Policies that maintain (and preferably expand) the
real incomes of citizens in the face of global
international markets and the policies of other
countries.
• These policies vary from domestically oriented
and open to international cooperation, to
aggressive courting of foreign investment, to the
beggar-thy-neighbor behavior of tax havens.
• It is not a substitute goal for prosperity.
How Is Competitiveness Measured?
• In the Global Competitiveness Index, taxation
comprises 2 of over 100 indicator variables.
• The GCI is highly correlated with GDP per
capita (rank-order correlation = 0.85).
• “No New Criteria!”
• For the most part, global competition does
not add a new criterion by which to judge tax
policy, but rather it changes how any given
policy meets those criteria.
What is Competitive Tax Policy?
• A low-rate, broad-base tax system that
establishes a level playing field; i.e. that does
not attempt to pick winners.
• The cost of following a high-rate, narrow-base
policy is even higher in an integrated world
economy than in a closed economy.
• Some exceptions, such as subsidizing research
and experimentation, can be justified.
Unpersuasive Economic Arguments
1. Lower taxes on base X are always better
because they reduce the disincentive for
businesses and individuals to do X.
2. Policy X is better than our current policy
because most other countries do X.
3. Lower corporate taxation is always better.
The Corporate Income Tax
• The corporate tax system creates a host of well-known
distortions.
• Although interest payments are deductible as a
business expense, corporations cannot deduct the cost
of equity financing. This causes inefficient incentives
for corporations to raise capital by borrowing.
• The two levels of tax, corporate and individual,
generally cause the cost of capital for corporate
businesses to be higher than it is for other businesses.
• Fundamental reform plans abound, but there are
formidable practical obstacles, including compatibility
with other countries’ tax systems.
Lower the Corporate Tax Rate?
• This would reduce the disincentive to invest,
but only for corporate businesses, unlike
accelerated depreciation that applies to all
businesses.
• It would reduce the incentive for MNEs to
shift taxable income to low-tax countries. This
could also be accomplished by cracking down
on transfer pricing abuses, etc.
• But beware of Unpersuasive Argument #1.
Abandon Worldwide Taxation?
• This would eliminate the competitive
disadvantage of US-based MNEs operating in
low-tax countries.
• But it would exacerbate income shifting
problems.
• It’s worth considering as part of corporate tax
reform, if US revenue could be defended.
Some Facts
• The United States has one of the highest
statutory corporate tax rates among
developed countries.
• The US marginal effective tax rate on capital is
the 7th highest among OECD countries.
Research Findings
• Inward FDI does seem to be influenced by
domestic tax policy.
• A link between corporate tax policy and GDP
level or growth—the ultimate objective of
economic policy—has been very difficult to
establish, in part because of the difficulty of
separating out the causal directions.
• High-tax countries are high-income countries,
or is it the other way around?
Promising Future Research
1. Which has a bigger “bang per buck,” a lower
corporate tax rate or accelerated
depreciation?
2. Does lowering the tax on US MNEs’ foreign
income increase their US investment?
3. How does cracking down on outward income
shifting affect FDI patterns?
4. What would be the effect of using a VAT to
replace much or all of US income taxes?