Sunday, March 26

The minimum corporate tax: Should it be higher?

One of the hottest debates in economics is that of the optimality of taxes and, specifically in recent times, on corporate income tax. In recent months, the OECD, supported by institutions such as the IMF, has agreed on a minimum corporate tax of 15% and in recent days, the EU has also proposed it. The original agreement led countries like Ireland, which had said in March that it would keep its rate at 12.5%, to accept the 15% rate.

This new minimum rate is well below the world average for this tax, 23.85% (compared to more than 40.11% in 1980). However, despite being considered insufficient by many, such as Zucman or Piketty, this new agreement sets an important precedent. With the agreement, the great debate opens again: What should we do with corporate tax? Should we lower it to attract more investment or, on the contrary, increase it taking care not to damage economic growth? Should we keep it constant? We are going to review some data and studies that may be useful for the debate.

Does cutting corporate tax increase economic growth?

According to the “trickle-down economics” theory, popularized in the 1980s by Reagan, a reduction in the tax applied to companies should result in greater economic growth and higher wages as societies have more money available for investment. However, is this theory correct?

A few months ago, the economists Gechert and Heimberger published a meta-analysis in which they analyze 42 studies with 441 estimates of the effect of corporate tax reduction on economic growth. One conclusion is drawn from their analysis: there is practically no effect of corporate tax cuts on economic growth. Thus, the argument that in order to attract companies and thereby increase growth and the well-being of citizens (an issue that goes beyond growth and is affected by the distribution of that growth, among other things), we must lower Corporation tax.

Lower Societies and raise more?

Lately, the idea has become popular in certain sectors, mostly liberal, that by lowering corporate tax, by increasing activity and economic growth, more money would be collected and therefore, this tax reduction “would pay for itself”. It is an application of the well-known Laffer curve. Certainly, the curve as such is a mere indicator of the collection capacity of a State. Positioning itself on the left side, with a positive slope, indicates that collection will decrease when the specific tax in question is lowered, and on the right side, that an increase in the tax rate will result in a reduction in collection and vice versa. In other words, those who point to the self-financing of this tax reduction consider that we are on the right side of the Laffer curve. Is this true?

In 2017, the economists Boscá, Domenech and Ferri, from the BBVA research service, published an estimate of the Laffer curve in Spain. In the curve corresponding to the implicit rate on the capital, they estimate that Spain could raise its collection up to 6% of the current level to reach the maximum collection. In other words, Spain is, in terms of taxes applied to capital, to the left of the Laffer curve. Therefore, if you reduce these taxes, your collection would decrease, not increase as proponents of trickle-down economics suggest.

Source: Boscá, Domenech and Ferri, 2017

How much would we collect with a minimum corporate tax of 15%?

As a result of the negotiation on the minimum corporate tax of 15%, the EU Tax Observatory, directed by the economist Zucman, has recently published a study in which they quantify how much the countries of the European Union would earn if this minimum were applied.

In the case of Spain, if this tax were applied and therefore, stopping the departure of Spanish companies to countries such as Ireland or Luxembourg to increase their net profit, it would raise up to 700 million euros per year, which is equivalent to 0.6% of the health spending. In total, the European Union would collect 48,300 million euros, a figure that is not negligible.

However, the 15% minimum tax has been harshly criticized by economists such as Zucman and Piketty, who accuse it of being insufficient (remember that it is well below the world average, both arithmetic and weighted). Although it sets an important precedent, the main proponents of this idea wanted to establish a minimum of 21-25%. According to a report by the EU Tax Observatory, directed by Zucman, if it were 21%, the additional collection would be higher, and could reach 5,300 million in the case of Spain and 97,900 million in the case of the EU. If a minimum tax of 25% were applied, the general type of companies in Spain, the additional collection would rise to 12,400 million euros, or what is the same, 43.6% of the collection for company tax and a 11% of spending on health. In the EU, the extra collection would amount to 167,700 million euros, equivalent to 12.1% of its spending on health. Finally, the authors evaluate the extra collection in case the minimum was 30%, in which Spain would collect an extra 21,200 million, which represents 74.6% of its corporate tax collection and 18.8% of your healthcare spending. The EU would collect 269,500 million more, 84% of its collection by companies and 19.4% of its spending on health.

The agreement on a minimum corporate tax for multinationals at the global level is historic. It is an idea that not long ago was branded as utopian and that will generate significant extra revenue for the public coffers. However, it runs the risk of being insufficient as it is below the world average corporate tax rate. Will this tax increase over time? We will see it soon. For this, the empirical evidence must serve as a guide in the debate.