Lhe economic slowdown seems to be confirmed in the countries of the Organization for Economic Co-operation and Development (OECD). In a context of weak economic growth and pressure on the labor market, governments are looking for an effective fiscal tool acting on productivity and/or employment, while avoiding an increase in public debt.
A shift from taxes on labor to taxes on consumption would make it possible to achieve this objective. Another effective tool would be to lower corporate tax (IS). Research shows that reductions in corporate tax over the last fifty years have boosted either innovation or employment in OECD countries.
These declines also had a pronounced effect on economic growth without reducing the share of labor remuneration in value added (“The Dynamic Effects of Corporate Taxation in Open Economy », Olivier Cardi, Fatma Höke and Romain Restout, Lancaster University Management School, Working Paper Series No. 3, 2024).
The reduction in the corporate tax rate
While the global minimum tax of 15% on the profits of multinationals has come into force since the start of 2024, it is interesting to look back at the evolution of the IS over the last fifty years in the countries of the OECD.
If we focus on the upper marginal tax rate on profits (to avoid biases linked to the tax complexity of each country and to allow international comparisons), the corporate tax rate which was 50% on average at the start of 1970s stands at less than 25% fifty years later.
Almost all OECD countries have therefore reduced their marginal CIT ceiling rate. But what led to this decrease? The main factor is the removal of capital controls, resulting in a free movement of capital, by definition very mobile.
Implementation of tax competition
Whether with the aim of long-term economic growth or out of dogmatism, OECD economies have continued to reduce their tax rates to attract capital. And the lower the neighboring country’s corporate tax, the more a country is tempted to lower its own, for fear that capital will move to its neighbor. This tax competition ultimately resulted in a tax rate of around 25% on average.
Note that the incentives to lower the corporate tax for small countries like Ireland, Luxembourg or the Netherlands were much greater than in large countries, because the gain in tax revenue generated by the influx of capital is potentially much greater than the reduction in tax revenue due to the reduction in the tax rate.
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