Tuesday, December 18, 2007

Europeans Discover Supply Side Economics

At a time when every Democratic candidate for President is proposing some kind of tax increase, it is interesting to see Europe heading in the opposite direction. Admittedly most of the tax reductions are on the corporate side but even personal rates are being reduced. Jurgen Reinhoudt has a good article at The American on the subject:

Bloomberg News reported this past May, “as leaders of the Continent’s biggest economies give up criticizing smaller neighbors for cutting business-tax rates and decide to join them instead.”

In recent years, the Netherlands has cut its corporate tax rate from 34 percent to 25 percent. Effective January 1st, Germany will slash its corporate rate from 38.7 percent to 29.8 percent, while abolishing a number of complex deductions in order to mitigate the budgetary impact. Germany’s hitherto high corporate tax rates have led to spectacular evasion, with companies hiding an estimated $82 billion per year from the taxman. Cutting rates will help change this. Plus, as Germany’s center-left finance minister, Peer Steinbr├╝ck, has said, “This corporate tax reform will make Germany a more attractive place for investment.”


And Europeans have also discovered the Laffer curve:


In the United Kingdom, the corporate tax rate has declined from more than 50 percent in the early 1980s to 30 percent today—yet tax revenues are surging. Given that the tax rate is low by recent historical standards, the spike in revenues prompted a group of British economists to write a paper asking, “Why has the UK corporation tax raised so much revenue?” Recognizing the success of lower rates, British Prime Minister Gordon Brown has announced that the corporate tax rate will be reduced from 30 percent to 28 percent in April.


Meanwhile, in the US, the corporate tax rate is stuck at 35%. US companies will find it increasingly difficult to compete with foreign companies paying much less of their profits to government.

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