IN THIS ISSUE:

  • Global Taxation: Will One Size Fit All?
  • U.S. Labor Market Dashboard
  • Microprocessor Shortages = Macro Problems

Government budgets have been stretched to their limits during the last 12 months. Some would say they have been stretched beyond their limits, and that national debt levels have gotten uncomfortably high. Imperatives created by the pandemic have left little room to fund other economic initiatives like infrastructure.

To bring things back into balance, the world’s governments are increasingly contemplating tax increases of various kinds. But as they do, they’ll need to consider cooperating with one another.

In the United States, the Biden administration is seeking to finance its $2.3 trillion American Jobs Plan through higher corporate taxes. The proposal includes an increase in the federal corporate income tax rate from 21% to 28% and reduced incentives to register corporate headquarters or intellectual property overseas. The U.K. has also announced a gradual increase to its corporate tax rate from 19% to 25%, starting in 2023. The risk associated with raising taxes, however, is the prospective loss of corporate headquarters, plants, and operations to other jurisdictions.

Weekly Commentary Chart 1

For the past four decades, nations have used corporate tax cuts to compete against one another for corporate investments, leading to what U.S. Treasury Secretary Janet Yellen has called “a race to the bottom.” Global average statutory corporate tax rates declined from 40% in 1980 to around 24% in 2020. By region, Europe has the lowest average corporate tax rate at around 19%, followed by Asia (average 21%), the Americas (27%), and Africa (28%). There is a wide divergence within Europe, with Ireland’s 12.0% effective rate at one end and Germany’s 27.5% at the other.

In theory, lowering corporate tax rates can fuel investments and productivity gains, in turn boosting economic growth and standards of living. However, these gains are often temporary in nature, lasting for only a few quarters. The tax cut under the previous U.S. administration serves as a good example. Lower corporate taxes provided only a transient lift to economic growth and investment, and households did not see the promised increase of $4,000 to average incomes.