Corporate tax and investment

Would a cut in corporation tax boost investment? Intuition says yes. And this report from the Taxpayers' Alliance says the effect could be large. This is because capital is more internationally mobile now, and so a cut in corporate tax would attract investment away from other countries - as Ireland discovered.
This paper (pdf) by Holger Gorg, Hassan Molana and Catia Montagna, however, tells a different story. They estimate that, among OECD countries, there's a positive correlation between corporate tax rates and foreign direct investment - it's higher tax rates, not lower, that are associated with high inward investment.
This, they say, is because high tax rates can be associated with a better educated and healthier workforce, better public transport and social and political stability, all of which attract international companies. They say:

Corporate taxation does not necessarily deter FDI, if it is associated with the provision of public goods than improve the economic environment in which multinationals operate.

This doesn't mean cutting corporate tax is silly. It's just that for such cuts to work, one has to be confident that they won't worsen the social and economic infrastructure that influences investment decisions.

Comments

[Mark Wadsworth]

That is a fair point actually, anyway it is not corporation tax that is the problem, 30% is not oppressive, it is VAT and Employer's NI that really foul things up, these ought to be got rid of post haste.

People invest in China because wages are low, does anybody know or care what the Chinese corporation tax rate is? Corporation tax in India is higher than ours, they still get the FDI because wages are lower.

[Alex]

You mean - make decisions based on evidence rather than fatuous ideology? *head explodes*

[Maynard Handley]

"
It's just that for such cuts to work, one has to be confident that they won't worsen the social and economic infrastructure that influences investment decisions.
"

There is, however, the pesky empirical fact that 97% of the people pushing for a reduced corporate tax (or a reduced almost anything tax) are precisely the same people who do want to reduce social and economic infrastructure. The two are separate concepts in theory, but in the real world they are joined at the hip --- to support one is to support the other.

[Kevin Carson]

I'm not sure how much differently your corporation tax is set up from the corporate income tax over here. But the chief benefit of reducing the latter would be reducing the competitive advantage conferred on 1) the beneficiaries of targeted exemptions like depreciation, the R&D credit, and the interest exemption, and 2) the giant oligopoly firms that, unlike those in the competitive sector, are able to use administered pricing to pass the tax onto consumers. The main effect of the U.S. corporate income tax is to heighten the difference in privilege between those directly hooked into the state capitalist system, and those on the outside.

[Mark Wadsworth]

Of course the best tax is Land Value Tax (or Site Value Rating) payable by the landlord (unlike Business Rates).

This raises money and does not deter inward investment in the slightest. Rents are fixed by the market, teh landlord cannot pass on LVT via higher rents, so this does not increase the cost of doing business in the UK at all (i.e. renting premises and getting cracking).

[Alex]

The problem with land-value taxation is that essentially two kinds of people make up most of its supporters - lefty snackthinkers who assume that you just tax land *handwave* and the revolution happens, and rightwing bash merchants who want tax cuts and don't happen to have any rental property.

[Mark Wadsworth]

But it's not just those two groups, is it?

What about a lot of LibDems (who are pretty middle-of-the-road), Greens (for environmental reasons), free-market liberals like Ricardo, Smith, Friedman (who saw it as the least-bad tax) and people who are against the CAP payments (which is negative land value tax) so on?

[Laurent GUERBY]

LVT will be escaped by building floating cities :).

[Glenn Athey]

Its the total tax take and the costs of compliance plus the benefits from paying the tax that matters.

Stats prop up Chris's point - 59% of FDI still goes to OECD countries.

[Roger Thornhill]

Correlation, not "proof".

Does anyone seriously think that Business says to itself "Oh, there is high tax, so therefore the place must be good...".

Nope, they take immediate, empirical evidence of the factors that make sense to them.

1- operational costs, i.e. taxes, duty, labour, land.
2- Availabilty of skilled workforce
3- Security of property rights/Rule of Law
4- political and economic stability

To say that the level of corp tax is a deciding factor appears pretty fatuous. High corp taxes might create or just be coincidental to other factors that outweight it, therefore we see correlation. A decidning factor? I very much doubt it.