Nova workboard

a blog from young economists at Nova SBE

A race to the bottom – lowering the corporation tax.

Earlier this spring the Danish central-left government decided to lower the corporation tax from its previous level at 25 pct. to the new 22 pct. The Danish government are following the British, Swedish and Finnish governments who already have lowered their corporate tax down to 20 pct (http://www.information.dk/telegram/458770).

This is done both to secure the Danish firms do not choose to leave the country, but also to attract more Foreign Direct Investments and international companies. The obvious argument is of course that it is more attractive for companies to be located in a country or region with a lower tax, but there is also another theoretical argument for lowering the tax. The theoretical models explain that a company will get more out of its investments by a lowering of the corporate taxes. Therefore the should be a mechanism for firms to invest more, hire more and thus create growth for the economy.

But the empirical evidence for this miracle cure is quite weak.  Over the past 30 years the corporation tax has gone down quite significantly, both in Denmark and the rest of Europe. But the level of investments has fallen at the same time, and there has not been registered notably higher growth (http://www.information.dk/458748).

At the same time as the Danish government decided to lower the corporate tax, a new British study showed that the vast majority of companies do not want to move to another country, just to avoid paying tax. The British auditing and consulting firm Grant Thornton has done a survey of more than 3.450 business leaders in 44 countries. They found that 67 pct. answered that they would not move their business to another country no matter how much corporation taxes were lowered (http://www.information.dk/458744). 

For Denmark the figure was even higher. Here 78 pct. of the respondents answered that they would not move, no matter how low the corporation tax would be. Some sectors, such as the financial sector, are responsive to tax incentives, but for other sectors, it is clearly not the case. The companies make decisions based on other factors such as infrastructure, workforce and market analysis.

For the companies who seek a lower corporation tax, changes country of a slightly lower corporation tax will not choose Denmark, Sweden or the UK. They will more likely choose Romania, Bulgaria or Ireland. But this is not a sustainable growth strategy. Take Ireland as an example; here it is often companies that will contribute little to the economy because they do not place their production in the country, but often their headquarters, which they can channel their profits to.

Therefore the European governments should move away from using the corporation tax to attract business. It is a logic without any financial evidence, which in turn is very unfavourable for both the internal market and Europe’s social cohesion.

By Ulf

 

 

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Author: studentnovasbe

Master student in Nova Sbe

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