Monday, April 02, 2007

Tax attraction

A counter-intuitive (or maybe just counter-doctrinal) finding on the effects of corporate taxation on inward investment, from a team at the Universities of Nottingham and Dundee. The countries which attract the most investment turn out to be the ones with higher taxes and levels of public spending - the opposite to what most neo-liberal economists would claim.

Holger Görg of Nottingham's Globalisation and Economic Policy Centre comments:
“Most economists have always argued that globalisation leads to a 'race-to-the-bottom' as countries compete to cut tax rates in the hope of attracting multinational investment and the jobs that come with it. The traditional theory is that this then leads to a shrinking of tax revenues and undermines the welfare state.

“But our evidence shows that overall effective corporate tax burdens do not appear to have fallen in response to capital and trade liberalisation, that countries aren't competing to cut taxes and actually, when investing abroad, firms find countries with higher taxes attractive because they associate them with a happy, stable workforce.”

One possible explanation is that multinationals are able to shift book profits between locations, so that the bulk of their taxes aren't necessarily paid in the locations where they have their main profit-generating operations. That may, in turn, further weaken the case for national or regional government bodies to pimp themselves out to potential inward investors by proffering subsidies or favourable treatment for investment which, in some cases, last only as long as the bungs. And it certainly makes a nonsense of much of the rhetoric of 'regional competitiveness'.

Full press release from Nottingham here.

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