At times of deep recession and high unemployment, one of the traditional measures to which governments aspire in order to stimulate their economies is a reduction in Corporation Tax rates. The reasons are two-fold. First, lower CT rates make individual countries more attractive to overseas companies looking to open new offices and / or factories. Secondly, the more profits that corporations can retain in their businesses, the more they have available to re-invest in new expansion and job creation.
If ever anyone wanted proof that this policy works, one need only look at the Irish experience. In Ireland, relatively very low Corporation Tax rates ( currently only 12.5 % ) succeeded in persuading a host of major companies like Dell and Google to set up shop there. Similarly, a steady reduction in rates by the UKs new Coalition Government is clearly arresting a small exodus of companies to lower tax environments overseas.
The only problem is that when most countries are under the same pressure, they can end up in a beggar thy neighbour auction wherein everyone is attempting to underbid everyone else. Also, countries with left leaning governments obviously have a problem cutting business taxes at a time when Joe Publics finances are under pressure.
This dilemma has already raised its head in France where the new socialist President, Francois Hollande, has indicated that he wants all EU countries to adopt a common rate of Corporation Tax. This policy has, in fact, already just been voted through by the European Parliament. Since Frances basic rate of CT is an eye-watering 33.1%, its clearly in its interests to make sure no other European countries can undercut it.
It will certainly be interesting to see how the UK reacts to this idea. It has gone to great lengths to encourage large overseas corporations to expand here and the governments Eurosceptic wing will have a field day if this proposal starts to gain any traction.
One group which is bound to come out smelling of roses if these socialist inspired tax rates take hold are the numerous tax havens like the British Virgin Islands where huge global corporations can still legitimately shelter a large part of their earnings via some imaginative creative accounting.