Peer Pressure: Tax Competition and Developing Economies
By Michael Keen and Jim Brumby
July 11, 2017
Versions in عربي (Arabic), 中文 (Chinese), Français (French), 日本語 (Japanese), Русский (Russian), and Español (Spanish)
A salesman checks an iphone in New Delhi, India: governments compete to attract investors with low corporate tax rates (photo: Adnan Abidi/Reuters/Newscom)
Economists tend to agree on the importance of competition for a sound market economy. So, what’s the problem […]
Can Japan Afford to Cut Its Corporate Tax?
By Ruud de Mooij and Ikuo Saito
(Versions in 日本語)
It is no surprise that, as part of its revised growth strategy presented in June, the Japanese government has announced it will reduce the corporate income tax rate. At more than 35 percent for most businesses, the Japanese rate is one of the highest among the industrialized countries of the Organization for Economic Cooperation and Development (see Chart 1). Moreover, at a time when Japan needs to boost economic growth, the corporate income tax rate is generally seen as the […]
Fixing International Corporate Taxation—Not Just a Problem for Advanced Economies
By Michael Keen
It’s hard to pick up a newspaper these days (or, more likely for readers of blogs, to skim one online) without finding another story about some multinational corporation managing, as if by magic, to pay little corporate tax. What lets them do this, of course, are the tax rules that countries themselves set. A new paper takes a closer look at this issue, which is at the […]
To Owe or Be Owned—Depends on How You Tax It
Corporate tax codes in the United States, most of Europe, Asia and elsewhere in the world, create a significant bias toward debt finance over equity. The crux of the issue is that interest paid on borrowing can be deducted from the corporate tax bill, while returns paid on equity—dividends and capital gains—cannot.
This debt distortion is not new. What is new, however, is that we have come to realize that excessive debt (or leverage) is much more costly than we had. The global financial crisis was a stark lesson about the risks of excessive leverage ratios in financial institutions.
Designing a better system will ultimately pay off. And now is the time for change. A recent IMF Staff Discussion Note offers two alternatives that reduce or eliminate the more favorable tax treatment of debt.