The corporate tax myth !

Why are corporate taxes decreasing year on year whilst corporate profits are growing exponentially? Is there really a correlation between corporate taxes and economical strength and growth? Will major corporations really leave our country if we increase taxation rates?

These are a really interesting topic to delve into as they are directly at the root of our political beliefs and thus pretty subjective. For this reason, I will keep to statistics and pure facts.

Corporate profits are continually rising

To start with I would like to set the scene with this first chart:

corporate profit USA

*These figures are from the federal reserve economic data. There is exponential growth in corporate profits in the US.

In Germany the trend is similar and in the UK the charts is a somewhat flatter but there is still growth.

Corporate taxes lower and lower

According to this data it is good to be a shareholder. In fact it is getting better and better to be a shareholder, especially in the major European economies. Not only has profit been on the rise, taxation has been decreasing years on year. The chart below demonstrates this phenomenon. The European average has been calculated from data from Germany, the United Kingdom, France, Netherlands, Belgium, Spain and Italy.
Corporate tax trend

​​​​​​​European corporations are taxed less and less whilst governments have been implementing draconian savings plans and raising all forms of taxes on the citizens.

We have been led to believe that by decreasing taxes on corporate profits we attract investments in our respective economies, creating jobs and raising the welfare of the working class. This is called the trickle down theory.

No link between corporate tax and economical growth

This would mean that those countries with the best economies have the lowest taxation rates. Well, that is not the case. There does not seem to be any correlation between taxation rate and economical performance or strength. See chart below:

Corporate tax per country

The US has the highest taxation rate and is leading the pack with economic recovery. Germany has one of the highest rates (8% more then the EU average) in Europe and is also the strongest economy.  By simply looking at these numbers it is just about impossible to make conclusions with regards to the effect of corporate taxation on the economy.

Declining corporate tax leads wealth Gap on the increase

So, why are we decreasing taxes whilst profits are rising and there is no correlation between taxation rate and economical performance? According to the trickle down theory, the stimulation of corporations through taxation benefits should result in wealth creation for everyone. Unfortunately this is really not working as the social gap is on the rise in all economies and across the whole world. There is plenty of documentation on the growing inequalities between the rich and poor. One interesting statistic from Oxfam is that the wealth of the world’s 85 richest people is now equal to that of the world’s poorest 3.5 billion people. The trickle down theory is just not working.

Corporations abandonning home soil for tax evasion

Over the last 2 decades, we are led to believe that major corporations will leave if the financial stimulation packages are not good enough. That they will seek new territories to install their factories, head offices etc… In Europe, this can be considered as a good argument as all countries are fighting for the same corporate pie. This is leading Europe to tax it’s citizens rather then wealth. This is giving rise to even more inequalities. 

Alignment of corporate taxes

The solution to this European problem is to have a single corporate taxation rate for the whole of block. This should be set in line with the US and at a reasonable level. Taxation should be done on the in-country activity rather then country of “residence”. The tax should then be redistributed according to the countries population and economical situation.  This solution would make all countries benefit, allowing taxes on citizens to be reduced resulting in wealth creation for everyone and really stimulating the economy. Not only would this benefit everyone, it is also ethical. 

High corporate taxes lead to higher re-investments

Taxing companies has also an add-on benefit. Not a single corporation or shareholder wants to pay taxes on profit. This means they will reduce the profit as much as possible by re-investing in the company. This can be done in many different ways, but we can expect companies to boost the research projects, invest in better tools, more efficient factories, and develop new projects to increase future gains. All these activities are positive developments, which will create jobs globally and will be the base of a sustainable economy. 

Date created: 25/08/2015       Date modified: 02/09/2021
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