Topic: International Economics and Development

French Presidential Candidate Calls for 25 Percent Corporate Tax Rate

It is always easy to make fun of the French for their hopeless infatuation with redistribution, intervention, and other statist policies. So it is rather embarrassing that France (33 percent) currently has a significantly lower corporate tax rate than the United States (about 40 percent, if state taxes are included). Imagine, then, how humiliating it will be if Nicolas Sarkozy wins the French presidency and follows through on his proposal to lower France’s corporate rate to 25 percent. To be sure, the impetus for a lower corporate rate is tax competition rather than a new-found appreciation for market forces. And even Sarkozy’s call for a lower corporate tax rate does not mean he has embraced the foreign concept of “laissez-faire.” As Tax-news.com reports, companies would have to jump through numerous hoops to benefit from the lower tax rate:

In an interview with French business daily La Tribune, Xavier Bertrand, a spokesman for the centre-right presidential candidate, said that Sarkozy wants to lower the rate of France’s corporate tax to 25%, bringing the tax down to about the average rate in the European Union. However, unlike France’s European partners, Sarkozy is keen to link a cut in corporate tax to a series of governance criteria, and companies would have to demonstrate that their employment, wage and investment strategies were “synchronised”. …Sarkozy fears that with key European competitors having recently announced corporate tax cuts, including Germany, Spain and the UK, France risks becoming increasingly unattractive as a place to do business and cannot afford to do nothing. Under plans agreed by Germany’s coalition government, the effective corporate tax burden there will fall to below 30% from almost 40% in January 2008, while the UK’s Chancellor of the Exchequer Gordon Brown announced a 2% cut in corporate tax in his recent budget speech. The old EU15 also continue to face growing tax competition from the new EU entrants in Central and Eastern Europe, such as the Czech Republic, where the government has announced proposals for a 15% flat tax on personal income and a 5% cut in corporate tax to 19%.

Albania Joins the Flat Tax Club

Spurred by tax competition, the flat tax revolution continues to generate positive results. Albania will have a 10 percent flat tax beginning in January 2008. The corporate rate also will be 10 percent, as will the payroll tax. The latter reform is particularly interesting since many of the flat tax nations in Eastern Europe retain punnitive payroll tax rates - a policy that undermines the pro-growth and pro-employment effects of the flat tax. The Southest European Times reports:

In a bid to promote growth and improve the business climate, the administration of Albanian Prime Minister Sali Berisha plans a major overhaul of the tax system. The biggest change is a switch to a flat tax. “As of January 1st, 2008, Albania will have implemented the 10% flat tax system, one of the lowest in Europe,” Berisha told a business community meeting in late March. Corporate taxes, currently at 20%, are to be slashed in half. Social security contributions from businesses will likewise be capped at 10%. The government and other supporters of the reform say it will widen the taxable base and simplify tax administration, while also making Albania an easier place to invest. According to Finance Minister Ridvan Bode, the changes will lead to a more streamlined fiscal system. “The flat tax helps eliminate the potential arbitrage between corporate tax, dividend taxes and the income tax,” he says. VAT and other taxes will also be gradually reduced in order to woo investors, the minister added. …In the past, the IMF has been wary of plans to reduce taxes in Albania. This time, however, it seems more receptive – provided the overhaul is combined with more effective revenue collection. “We will negotiate with the Albanian government about the tax reduction, depending on the tax collection,” IMF representative Ann Margaret Westin told the press.

Mauvaises Idées

The International Herald Tribune reports that Ségolène Royal, the Socialist Party candidate for the French presidency, wants to impose price controls on banking services. She also wants to distort the allocation of credit by having the government guarantee loans to young people.

These ideas do not make economic sense, but they are a sign of pogress. Thirty years ago, a Socialist in France would be arguing for nationalization of banks. At this rate, maybe the Socialists will be advocating free market ideas within 300 years:

In a French presidential campaign with recurrent anti-capitalist undertones, the Socialist Party candidate, Ségolène Royal, took aim at banks Tuesday, accusing them of penalizing the poor with low interest rates on savings and high overdraft fees.

…Banks should pay customers more interest on current accounts than the 0.5 percent to 3 percent common today, Royal said. They should also credit bank accounts on the day a transfer is made, and give every young person with a “project” a free €10,000 loan that would be guaranteed by the state.

New Estonian Government Plans to Lower Flat Tax Rate

The International Herald Tribune reports that the new government in Estonia plans to lower the rate on the flat tax from 22 percent to 18 percent. Estonia already ranks as one of the world’s most laissez-faire economies. Reducing the flat tax rate - which was originally imposed at a rate of 26 percent - will further enhance Estonian competitiveness and increase the power of tax competition in Europe:

Estonian lawmakers on Wednesday gave Prime Minister Andrus Ansip the go-ahead to form a new center-right government that is expected to cut the Baltic country’s flat income tax. …Ansip’s center-right Reform Party, the conservative IRL union and the centrist Social Democrats agreed earlier this week on a coalition platform. They plan to continue market-friendly policies in the country of 1.3 million, including reducing the flat tax from 22 percent to 18 percent by 2011. High-tech Estonia has one of the European Union’s fastest-growing economies, and some economists credit the flat tax, which means everyone pays the same tax rate as opposed to the progressive rate that most European countries use.

Czech Government Officially Proposes Flat Tax

Although its prognosis is unclear because of the ruling government’s lack of a firm majority in parliament, the Czech government has unveiled its flat tax. Combined with reductions in social welfare spending, the tax reform could dramatically boost Czech competitiveness and put more pressure on Western Europe’s welfare states. Tax-news.com reports:

The Czech government has announced a raft of major tax reform plans, which include a flat tax on personal income, a significant reduction in tax on corporate income, and changes to the value-added tax regime. Under the proposals announced by Finance Minister Miroslav Kalousek, if approved Czech taxpayers will pay a 15% flat tax on their personal income, while companies will see their income tax rate drop to 19% from the current 24% by 2010. At present personal income tax rates vary according to wages, and range from 12% to 32%. The lower rate of value-added tax will increase under these reforms to 9% from 5%, but the headline rate will remain unchanged at 19%. …with the tax cuts accompanied by some major cuts in welfare spending, such as unemployment benefits and healthcare, the government is sure to encounter opposition from the left.

The USTR Pulls An All-Nighter

With only minutes before a key deadline, the Bush administration formally notified Congress last night that a deal had been reached with South Korea on a free trade agreement. The Office of the United States Trade Representative’s press release (which contains not many details and plenty of the usual mercantalist, all-exports-all-the-time rhetoric) can be viewed here.

As expected, rice was not included in the agreement. Korean negotiators had been adamant that rice, an extremely sensitive (i.e., protected) sector in Korea, was not on the table for negotiation and that a deal would be impossible if the United States insisted on pushing for access to the Korean rice market. On that basis, the Americans evidently decided to drop the rice issue.

Rice was never so much a concern, though, as beef. U.S. beef has been denied access to Korea on food safety grounds since late 2003, when BSE was found in beef originating in Canada. Although the issue was not formally part of the FTA negotiations, and thus was not resolved in the agreement itself, it has the potential to scupper it if lawmakers link their approval of the deal to resolution of the beef dispute. Sen. Max Baucus (D-MT), chair of the Senate Finance Committee, has made it clear that his support for the Korean FTA depends on a full re-opening of the Korean market to U.S. beef. (The Ranking Member of that Committee, Sen. Chuck Grassley (R.-IA), was somewhat more measured in his comments).

Similarly, Sen Debbie Stabenow (D-MI) sees that reducing Korean tariffs (albeit over a long phase-out period for trucks) on U.S. autos and a “restructuring” of the Korean auto tax structure is not enough: her press release insists that she will “do everything in [her] power to defeat this agreement and ensure that any future fast-track authority includes provisions guaranteeing that American businesses and workers can get a fair deal”. Sen. Stabenow does not say what specific measures would assuage her concerns, although one suspects that she is offended at the USTR’s refusal to specify minimum guaranteed sales targets.

In short: yes, the USTR met the deadline of concluding the deal so that it can be considered under fast-track authority. But its passage is far from secured.

More broadly, though, the statements of these lawmakers, especially if it is a taste of what is to come, should worry free-traders everywhere. While bilateral and regional trade agreements are, at best, only the third most optimal way of liberalising trade, the deal between South Korea and the United States was one of the more worthwhile agreements of this administration. And if Congress is going to base support for agreements on its ability to manage trade in certain sectors, then the trade agenda is in serious trouble.

Irish Commissioner Fights EU Tax Harmonization

The former finance minister of Ireland, Charlie McCreevy, is now an EU commissioner. To his credit, he does not appear to have sipped the Kool-Aid in Brussels.

While most EU commissioners push for centralization and tax harmonization, McCreevy is making waves by denouncing the tax harmonization schemes of a fellow commissioner. The Sunday Business Post reports:

Ireland’s European Commissioner, Charlie McCreevy, has launched a strong attack on the European Commission’s efforts to introduce a common business tax base across Europe. McCreevy has warned of the danger of a ‘‘bully-boys’ charter’’ which would favour large states over smaller members like Ireland.

…McCreevy said the tax harmonisation issue was being ‘‘aggressively pushed forward by some in Europe’’. …Referring repeatedly to ‘‘tax harmonisation forces’’, McCreevy warned that, were they successful, it would threaten inward investment to the EU, undermine competitiveness and discriminate against smaller EU states.

Despite outright opposition from a number of member states, including Ireland, the commission has continued to lay the groundwork for the adoption of a common tax base, which is feared by many to be a prelude to the harmonisation of tax rates across Europe. Such a move would inevitably lead to considerably higher tax rates in Ireland, which has among the lowest corporate and personal tax rates in Europe. Brussels sources say there is increasing resentment about the success of Ireland’s low-tax strategy — which is seen by many as ‘‘unfair tax competition’’.