Race to the bottom

 

 

Thomas Friedman, noted columnist, has nicely explained on how the world is getting flattened in his book, The world is flat. Capital is flowing across national borders. Corporations are shifting for better "price and value" combination siting their operations where they find a better combination of resources, better rule of law, skills, finance, security and most importantly a suitable tax policy (lower corporate tax rate). Inversely, countries are striving to lower taxes drastically to sustain and attract inward investment. This is clearly a warning signal for the US, China and the like to go along with the current drift or face tough times ahead.

Fourteen years ago, the corporate tax rate in most industrialised nations was as high as 50% while, interestingly, personal income tax was more hurtful, averaging nearly 70%. But the last 14 years have witnessed dramatic tax reduction. According to study conducted by the research group, KPMG, on tax scrutiny for the last one-and-half decades in 86 countries revealed that there has been a sharp decline in corporate tax, dropping from an average of 38% to 27.1%. Tax reduction took a dramatic turn shortly after the Thatcher government called for tax reduction from 52% to 35% between 1982 and 1986 in the UK. Sweden has narrowed its tax rate from 60% to 28%. Norway has witnessed 22% reduction while the German government has also been forced to reduce its tax rate from nearly 40% to less than 30%. France has also announced a 5% tax cut. Well, the competition is not confined only to Europe. Corporate income tax in Australia and New Zealand are slated to come down to 30%. Canada plans to reduce by 2% and Russia by 4%.

However, history is the testimony to the fact that tax reform has unanimously simplified tax regimes, liberated businesses and created employment as well as wealth. Countries like Switzerland, Hong Kong or Estonia have witnessed robust outcomes for long run through tax reduction. Many countries like China and the US worry about revenue if they reduce taxes. But a close look will clearly reveal that for the short run, countries might struggle for revenue, but with increasing investment and jobs, revenue will surely expand in the long run. But if they don't fit themselves in with the trend, they will be in trouble at a time when countries are competing to be more investment friendly. Here is a message for all those who want to play or sustain a global economic role.