Following the recent “Brexit,” Great Britain’s Chancellor of the Exchequer, George Osborne, is making significant corporate tax cuts the centerpiece of his plan to “build a super competitive economy.” The Financial Times reports:
Mr. Osborne wants to set the lowest corporation tax rate of any major economy, announcing a target of less than 15 per cent, down from 20 per cent now. He said Britain should “get on with it” to prove to investors that the country was still “open for business”.
This move would bring Britain’s corporate tax rate much closer to neighbor Ireland’s 12.5 percent. Already a prime destination for multinational firms – and U.S. companies fleeing our excessively high rates – this cut could stimulate more economic growth for the nation.
However, former European Union (EU) cohorts are crying foul over this attempt to maintain a competitive edge in a global marketplace. The Independent reports that the announcement has sparked worries about a “race to the bottom” and pushback from some leaders:
Germany's finance minister, Wolfgang Schäuble, said Germany had "no intention" of doing likewise after Mr Osborne announced UK corporation tax would be cut by five per cent.
Presenting his 2017 budget in Berlin, Mr Schäuble said his country was “not opposed to fiscal competition" but that it had to be "fair”.
It’s unfortunate that some are greeting this development with criticism rather than taking the opportunity to reexamine their own business environment. Of course, this isn’t surprising when the EU’s official perspective is that tax competition is “harmful.”
Far from being harmful, robust tax competition is a boon for business, consumers, and taxpayers. Writing for the Heritage Foundation in 2001, current Cato Institute scholar Dan Mitchell makes the case for the many benefits of tax competition:
Tax competition occurs when individuals can choose among jurisdictions with different levels of taxation when deciding where to work, save, and invest. This ability to avoid high-tax nations makes it more difficult for governments to enforce confiscatory tax burdens. In effect, tax competition pressures politicians to be fiscally responsible in order to attract economic activity (or to keep economic activity from fleeing to a lower-tax environment).
Tax competition can occur between countries or between state and local governments. Like other forms of competition, tax competition protects against abuses.
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Lower tax rates reduce the burden of government on businesses and create an environment more conducive to entrepreneurship and economic growth. Without competition, politicians can act like monopolists, free to impose excessive tax rates without fear of consequences.
Rather than bewailing this move by Mr. Osborne, other EU countries should respond by making their own reforms to their tax codes, as well as their burdensome regulatory regimes that impose enormous costs on businesses. More importantly, this should light a fire under U.S. lawmakers to slash our own corporate tax rates here at home that would facilitate the economy and encourage innovation.
Our friends across the pond are taking serious steps to boost their economic growth and if we fail to act we could risk losing more ground.