Taxes on corporations are plummeting across the globe as countries struggle to keep up with multinational firms shifting their profits to foreign tax havens, economists say in a new paper.
The average corporate tax rate globally has fallen by more than half over the past three decades, from 49 percent in 1985 to 24 percent in 2018, the study found.
“Corporate taxes are going to die in 10 to 20 years at this rate,” Ludvig Wier, an economist at the University of Copenhagen and a co-author of the study, said in an interview. “Without drastic collective action, you can see we’re nearing the end of it.”
The international decline in corporate taxes threatens to drain governments of a source of funding for health care and other social welfare programs, while already leading many European countries to adopt larger regressive sales taxes on goods, Wier said.
Proponents of tax cuts have maintained that lower corporate rates spur capital investment and business growth, improving worker productivity and wages. But the academics say the falling tax rates instead reflect a race to the bottom as nations try to prevent multinational firms from “artificially” shifting their profits overseas through accounting gimmicks.
About 40 percent of profits earned by national firms — or more than $600 billion — was shifted to a handful of tax havens such as Bermuda and Ireland in 2015, the latest year for which data were available, the researchers found.
“This massive tax avoidance — and the failure to curb it — are in effect leading more and more countries to give up on taxing multinational companies,” the authors wrote in a summary of their research published by the Centre for Economic Policy Research on Monday. (Wier wrote the paper, released last month, with University of California at Berkeley professor Gabriel Zucman and Thomas Tørsløv, also of the University of Copenhagen.)
Some economists doubted the paper’s conclusion, as some research shows that a country’s tax rate can significantly affect the amount of “real investment” for major countries, said Eric Toder, co-director of the Tax Policy Center, a nonpartisan think tank.
In the United States, taxes on corporations fell from about 50 percent in 1980 to 24 percent this year, using a measure that factors in average state taxes on businesses. Last fall, Republicans in Congress slashed the U.S. federal corporate tax rate from 35 percent to 21 percent. (Democrats have criticized the law as a giveaway to the wealthy but have largely stopped short of calling for the rate to be returned to 35 percent.)
By cutting the rate, the United States was joining a crowded party. In Japan and China, corporate tax rates have fallen by about a quarter since 2003. Rates are down about 30 percent over the same period across all of Europe, by 36 percent in Israel and by 27 percent in Canada.
And that’s not even getting to the most dramatic examples, such as Hungary, which has lowered its corporate tax rate from 18 percent to 9 percent, or existing tax havens with no corporate taxes, such as Bermuda and the Marshall Islands. Corporate tax rates have dropped similarly in parts of Africa and South America.
The falling corporate tax rate represents a “collective action problem,” Wier argued, as each country has a strong incentive to lower its own tax rate, although when that is done the globe suffers.
The moves can pay big dividends for the tax-sheltering countries. More than $100 billion in multinational profits was shifted to Ireland alone in 2015, far increasing what that country would have seen in corporate tax revenue had it not become a tax haven, the researchers said.
But the overall trend has suppressed corporate tax rates globally, and the consequences of the loss of revenue may be rising. Throughout the 1980s, multinational profits amounted to only 4 percent of all profits earned by companies among “economically advanced” nations. From 2010 to 2018, they accounted for 16 percent of all business profits in those countries.
“There is nothing natural in the decline of corporate income tax rates,” the paper’s authors said. “Profit shifting, more than tax competition for productive capital, is the key driver of this decline.