Tax-Cut War Widens in Europe as U.K., France, Germany Jump In

Discussion in 'Economics' started by crgarcia, May 28, 2007.

  1. By Simon Kennedy

    May 29 (Bloomberg) -- A tax-cut war is spreading across Europe as leaders of the continent's biggest economies give up criticizing smaller neighbors for slashing business rates and decide to join them instead.

    The move toward lower levies on corporate profits in Spain, Germany, France and the U.K. is aimed at wooing companies and reinforcing the strongest economic expansion in six years. It comes after Ireland and new European Union members from eastern Europe succeeded in attracting investment, and irking their larger rivals, with tax rates of less than 20 percent -- among the world's lowest.

    ``The gloves are off,'' says Erik Nielsen, chief European economist with Goldman Sachs Group Inc. in London. ``Bigger countries are now competing on taxes. This is very much something that will determine how much and where companies want to invest.''

    The EU's average corporate tax rate at the end of 2006 was a record-low 26 percent and is falling even more. Gordon Brown, the U.K.'s chancellor of the exchequer and prime minister-in- waiting, in March lopped 2 percentage points off the top rate, which is now 28 percent. Germany's lower house of parliament last week backed Chancellor Angela Merkel's plan to pare its corporate rate to 30 percent from 39 percent.

    Cutting Rates

    Nicolas Sarkozy, elected French president this month, promises to reduce his country's 33 percent rate by at least 5 percentage points. Spanish Prime Minister Jose Luis Rodriguez Zapatero's government is cutting its rate to 30 percent from 35 percent; and the premier of Italy, Romano Prodi, is considering a reduction in his country's 33 percent rate.

    The rush to lower business taxes is a turnaround for the region's biggest nations, whose governments once complained their neighbors were engaging in ``tax dumping'' and threatened to cut aid to them. Just three years ago, Sarkozy, then France's finance minister, sought EU support to implement a common minimum corporate tax rate throughout the bloc.

    Feeding the complaints were business-tax reductions by Poland, Slovakia and Hungary prior to their European Union entry in 2004. Poland cut its levy to 19 percent from 27 percent. Slovakia adopted a flat-tax rate of 19 percent, down from 25 percent, and Hungary went to 16 percent from 18 percent.

    The lower rates helped lure operations from companies in higher-tax countries. Paris-based automaker PSA Peugeot Citroen SA and Munich-based engineering firm Siemens AG, for example, moved some production to Slovakia.

    `Strengthening Growth'

    ``Corporate tax has been an important part of the story in strengthening growth, balances of payments, fiscal performance and currencies'' in eastern Europe, says Philip Poole, head of emerging-markets research at HSBC Holdings Plc in London.

    Now, falling budget deficits are making it easier for Sarkozy and other leaders to join the tax-cutting competition. JPMorgan Chase & Co. forecasts the budget shortfall in the 13 nations that share the euro will shrink to 1 percent of gross domestic product this year, down from 2.5 percent in 2005.

    Supporters of lower corporate taxes point to the success of Ireland, whose 12.5 percent rate, the lowest in the developed world, is down from 47 percent in 1988.

    That proved a magnet for such U.S.-based technology companies as Microsoft Corp., Intel Corp. and Dell Inc. and helped Ireland's economy grow more than three times the rate of the euro-area in the past decade, while still running a budget surplus in nine of the 10 years.

    `Taxes Are Key'

    ``Taxes are key for us,'' says Joe Macri, head of Microsoft's Irish unit, which employs 1,200 people in Dublin.

    Goldman Sachs's Nielsen is betting that lower corporate taxes, by making businesses more competitive, will help euro- zone economies grow at a faster rate without heating up inflation. An improved business climate has helped boost that rate, the so-called speed limit, to as much as 2.5 percent for the bloc's economies, from 2 percent, he says.

    That's consistent with the findings in a study of 86 countries last year by KPMG International, which showed corporate tax cuts allow countries to attract and retain business investment with little loss of revenue. While governments collect less from companies, the difference is offset by new revenue stimulated by expanded hiring and spending, the study found.

    ``It's not just a free gift to companies; it's a way to improve the overall economy,'' says Loughlin Hickey, London- based head of KPMG's global tax practice.


    How much corporate tax cuts encourage growth remains a subject of debate.

    ``Evidence on the links between taxes and investment is not fully conclusive,'' says Stefano Scarpetta, an economist at the Paris-based Organization for Economic Cooperation and Development, which plans to finish a research project on the question by March.

    Taxes are also only one factor companies consider when deciding where to locate. Employment regulations, workforce skills, wage levels and infrastructure are also decisive.

    Poland, for example, lures investment because its labor costs average 3.80 euros ($5.11) an hour, compared with 27.87 euros an hour in western Germany, according to the IW institute, a Cologne-based economic-research organization.

    Governments may also make up for lost corporate tax revenue by raising taxes elsewhere. As Brown reduced the U.K.'s main rate of corporate tax in March, he also pared allowances on plant depreciation. Merkel plans to limit corporate tax breaks on interest payments and lease contracts.


    For now, the corporate tax war looks unlikely to spread beyond Europe to include the U.S. and Japan, which worries some business lobbyists and government officials in the two countries.

    ``We're falling behind,'' says Grover Norquist, president of the Washington-based Americans for Tax Reform, who wants Republican presidential candidates to pledge lower corporate taxes. ``It's not good for job creation,'' he says. ``We should never be higher than the Europeans.''

    U.S. Treasury Secretary Henry Paulson said May 10 that a 43 percent drop in foreign direct investment in the U.S. since 2000 may be explained in part by the U.S. taxing ``capital more highly than in many parts of the world.''

    Even so, overhauling the corporate-tax system ``is unlikely over the 20 months that I'm going to be here,'' Paulson said. President George W. Bush's Republican Party lost control of Congress to the Democrats in the 2006 election, and Bush leaves office in January 2009.

    The outlook is much the same in Japan, where the government has little room to maneuver as it tries to contain the world's largest public debt and balance its budget by 2011. Prime Minister Shinzo Abe is deferring debate on a corporate tax cut until after upper house elections in July.

    Mitarai Fujio, chairman of Keidanren, Japan's largest business lobby, wants the corporate tax rate cut to 30 percent from 40 percent. ``It's not selfish to ask that our tax rates be on a par with those of other countries,'' he says.

    To contact the reporter on this story: Simon Kennedy in Paris at
    Last Updated: May 28, 2007 19:11 EDT
  2. Yeah, that's it. Furriners aren't building their plants here because corporate profits taxes are so high. What a load of manure.

    Its SS, Medi, Healthcare, 401k, high wages, legal costs and high services costs that drive business offshore. All we need to do is cut everything by 2/3 and we can compete with Asia.

    How pathetic that they would even attempt to blame the exodus on corporate profits taxes.