Lowering corporate taxes boosts investments, recent study shows

by the EESC's Employers' Group

Corporate taxes are the most harmful form of taxation for economic growth. Contrary to public perception, there has been no reduction in corporate tax revenues in relation to GDP in the last 40 years. Countries that have reduced their effective corporate tax rates in recent years have seen increases in investment in the following years. These are some of the conclusions of a recent study commissioned by the European Economic and Social Committee at the request of the Employers' Group.

A high corporate tax rate can hamper business activity by making certain investment projects unprofitable, and consequently, lowering the tax base and thus revenue collection. On average, a one percentage point increase in the tax rate on foreign direct investments (FDI) leads to a decline of FDI by 3.7%.

Analysis also shows corporate tax cuts do not necessarily lead to significant shortfalls in public finances, but can in fact be approximately self-financing. In the case of six countries, reductions in corporate tax rates led to an increase in revenues. Lower corporate taxes means more growth - cutting the tax rate by 10 percentage points can raise annual growth by 1-2 percentage points.

"The study aims to serve as a useful and reliable tool in the discussion on taxation. This is especially important in the current situation in the European Union, where public perception of the taxation of companies (especially large multinationals) is distorted and exploited by populists", stated Krister Andersson, vice-president of the Employers' Group. The study provides data and concrete examples to counter-act this narrative.

While tax rates have fallen significantly over the past forty years, the revenues from corporate tax as a share of GDP are still at similar level to the 1980s. Corporate tax revenues are mostly in the range of 2-3 % of GDP while tax revenues from wages, VAT and payroll taxes combined are more than 30 %.

The study is available for download on the EESC's website at the following link: https://europa.eu/!NB43bP (lj)