Industrialised countries have embarked on a bout of corporate tax competition even as their overall tax burden rose to record levels.
The Paris-based OECD said competition on corporate tax rates was intensifying, partly as a response to weak investment.
Angel Gurría, secretary-general of the OECD, said the increase in corporate tax competition “raises challenging questions for governments seeking to strike the right balance between maintaining a competitive tax system and ensuring they continue to raise the revenues necessary to fund vital public services, social programmes and infrastructure”.
Eight countries reduced their corporate tax rates in 2017, with cuts averaging 2.7 percentage points. Hungary led the charge, cutting its corporate tax rate to just 9 per cent. The OECD said competition was also rising over tax incentives, in particular for research and development and activities linked to intellectual property.
The changes reinforce a trend that has pushed down average corporate tax rates in OECD countries from 32.2 per cent in 2000 to 24.7 per cent in 2016.
However, the OECD said the fall in corporate tax rates had not been reflected in a decrease in corporate tax revenues. It described this as a “paradox”. The OECD said this was partly attributable to increases in corporate profits as a share of national income but further work was needed to better understand it.
Tax competition to attract wealthy individuals appeared to be intensifying, too, the report said. Countries such as Italy and Portugal were focusing on wealthy individuals to broaden their tax base and stimulate entrepreneurship.
The OECD also reported that the average tax-to-GDP levels in industrialised countries reached a record in 2015. The ratio, which fell to a low of 32.4 per cent in 2009, increased by 0.1 percentage points in 2015 to reach 34.3 per cent.
Only four OECD countries — Norway, Ireland, Luxembourg and Slovenia — reported lower tax-to-GDP ratios in 2015 than in 2010. Other countries experienced increases ranging from 0.02 percentage points for the UK to 4.5 percentage points for Japan.
The rise in the tax-to-GDP ratio generally reflected steps taken by governments to rebuild public finances. But taxes on labour income declined on average between 2013 and 2016, reversing the trend for increases in the wake of the financial crisis.
Countries are also cutting income-tax rates for lower earners to address inequality. The OECD said that greater fairness was an important driver of tax reforms to compensate for the faster growth of top incomes since the recovery in 2010.
But it also noted that social security contributions remained high in many countries. As these are normally levied on a fixed proportion of incomes, they tend to hit low-income earners harder than wealthier ones.
The latest figures underline the big increases in taxation across the world over the past 50 years, as governments funded an expanding public sector. In 1965, measures of tax-to-GDP ratios in OECD countries ranged from 10.6 per cent in Turkey to 33.6 per cent in France.
The US, where the administration has announced plans to reduce its corporate tax rate, had the highest rate in 2016, followed by France and Belgium.
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