Corporate tax ‘race to the bottom’ hurts EU growth

Both industrialised and developing countries will face a “major public funding crisis” unless governments stop the race to lower business taxes, according to a report from the International Confederation of Free Trade Unions.

In the last 20 years, corporate tax rates in industrialised countries have fallen from around 45% to 30% and could hit 0% by 2050 if governments continue cutting corporate tax rates and business keeps finding ways of avoiding paying taxes. 

In the EU, free movement of capital, investments and companies has led to fierce competition on lowering statutory tax rates. 

The accession of the ten Central and Eastern European countries in 2004, which rely less on company taxation to finance their budgets, has intensified this rivalry. Between 1995 and 2005, the average statutory rate fell respectively by 8.1 and 10.8 percentage points in the EU-15 and the EU-10. 

Furthermore, the study predicts that corporate tax rates in Europe will continue their race to the bottom. In 2005, Austria cut its rates from 35% to 25%, while rates in Finland and Greece went down by 3 percentage points. Germany is currently preparing a major corporate tax overhaul and the accession of Romania and Bulgaria in 2007 will further increase the downward pressure on rates. 

The rise of tax competition in Europe has sparked the debate about whether business taxes should be harmonised within the community. In April 2006, the Commission suggested harmonising tax bases (see EURACTIV 3 April 2006) but its proposal received very mixed reactions from EU Ministers. If European countries continue to drive down corporate tax rates in this way, funds available for government investment and spending will be lost, at a time when Europe needs public finances more than ever to invest in its feeble productivity and to deal with its mounting demographic challenge, says the ICFTU report. 

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