Countries jump on tax-reform bandwagon. International trend toward lower tax rates prompted by desires for faster growth and greater corporate investment
The ``soak the rich'' philosophy of taxation is weakening around the world. This trend began well before the United States Congress passed a tax reform bill last month that lowers the top income tax rate on individuals to 28 percent (33 percent in some cases).Skip to next paragraph
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Many governments abroad had already decided that high rates, which were meant to make the well-to-do pay a larger share of their income in taxes, were counterproductive. The feeling was that they were discouraging investment and hard work while encouraging legal tax avoidance or illegal tax evasion.
However, Washington's long debate about tax reform and now the signing of the new law are prompting more reform in other nations, partially because of the international competition both for business investment and for people with special talents.
``I hope our adoption of tax reform in this country will stimulate action abroad,'' says Beryl Sprinkel, chairman of President Reagan's Council of Economic Advisers.
Here in Canada, Finance Minister Michael Wilson outlined his plan for reform of the federal tax system Oct. 23. It involves lower personal income tax rates and higher taxes on corporations, especially through a business transfer tax similar to the value-added taxes so popular in Western Europe. Details of the plan will be included in a ``white paper'' to be released around the time of the new budget in February.
On Oct. 24, Japan's government unveiled tax proposals that include a $17 billion cut in personal income tax rates, with the number of tax brackets reduced and the maximum rate dropping from 70 to 50 percent. The government also intends to introduce a broad-based ``indirect tax.''
And earlier last month, France's new conservative government announced its intention to reduce gradually the marginal rate for individual income taxes from the current 65 percent to 60 percent and eventually to 55 percent.
Since the late 1970s, many nations have reduced their highest tax rates on individuals, according to a report by Alan Reynolds of Polyconomics, Inc., Morristown, N.J.
Several countries with very high rates have reduced them to under 70 percent: for example, Britain (60 percent), Portugal (69 percent), Ireland (65 percent), Italy (62 percent), and Norway (62 percent).
Other countries have trimmed their rates to 50 percent or below, including India (50 percent), Turkey (50 percent), New Zealand (48 percent), Jamaica (33 percent) and the Philippines (35 percent).
Only Belgium swam against the tide, raising its rates from 60 to 72 percent.
Mr. Reynolds, an enthusiast for the supply-side school of economics that champions low rates as a means for stimulating individual as well as corporate enterprise, suggests that the result in Belgium has been five years of zero economic growth.
On the other hand, says Reynolds, when India reduced its rates, stock market prices in Bombay doubled and individual tax revenues increased by 40 percent in one year.
Is there a competition between nations in taxes?
``Absolutely,'' says David Dodge, Canada's assistant deputy minister of finance for tax policy.
Canada has had to structure its corporate taxes so that they are not too different from those of the United States. Otherwise, says Mr. Dodge, multinational corporations steer profits to the area with the lowest tax rates by pricing devices or other internal accounting techniques.
Canada's combined federal-provincial corporate tax rate runs about 43 percent, compared to federal-state rates of about 37 percent in the US.
Similarly, Canada must avoid having personal tax rates too much higher than the US or it will encourage ``brain drain'' to the south.
``One has to be cognizant of that,'' admits Dodge. ``You clearly worry about getting too far out of line.''
When the US tax reform is in place, Canada's combined personal tax rate (federal and provincial) will be about 10 percent higher than the US combined federal-state rate.
The tax reform philosophy in Canada, says Dodge, is similar to that which has prevailed in the US. It aims at promoting greater economic efficiency by encouraging business and individuals to act according to economic realities rather than tax considerations.
Canada has fewer special tax loopholes for individuals than the US, but it has been chipping away some of the special tax benefits assisting some industries and corporations.
The government, however, does not intend to have a ``completely level playing field in taxation,'' he adds. It wants to encourage savings, capital formation, and risk-taking with the tax system.
Reynolds points out that international tax competition affects capital flows, exchange rates, interest rates, and labor costs.
Another supply-sider, author George Gilder, maintains that governments everywhere will begin to lower their tax rates further to compete with the US. ``The result,'' he claimed in a recent speech, ``will be an overwhelming surge of global growth.''
Joseph Pechman, a liberal tax economist, gives a qualified approval to the trend to reduce marginal tax rates.
``It is a good thing provided government doesn't make up the money by increasing regressive taxes,'' he says.
In other words, taxes that hit individuals with lower incomes more than those with higher incomes should not be increased; rather, the loopholes that favor the well-to-do should be eliminated or cut back, the Brookings Institution economist holds.