December 16, 2006
By Daniel J. Mitchell, Ph.D.
The report, co-published with PriceWaterhouseCoopers, ranks
business tax regimes in 175 nations. The Maldives, a small and
obscure island nation ranks first, but other nations to earn top-10
rankings are more familiar, including Ireland, Singapore, Hong Kong
and Switzerland. The United States, unfortunately, ranks 63rd,
trailing countries such as Syria, Uganda and Mongolia.
America's tax rate is too high according to the report, but the
biggest obstacle to U.S. competitiveness is tax complexity. With
5,100 pages of "primary tax legislation," the burden of red tape is
exceeded by only four other nations.
America should radically reform the tax treatment of business,
but the real story of the report is that the World Bank has
embraced free-market tax policy. Among the key findings:
--High tax rates and complicated tax regimes hurt growth.
"Overall growth is also higher with lower taxes and better
collection. And with tax incentives aligned to encourage work, more
firms and more jobs are created. One study shows a cut of one
percentage point in corporate tax rates is associated with up to a
3.7 percent increase in the number of firms and up to 1.1 percent
--High tax rates and complicated tax regimes encourage tax
"Complicated tax systems can lead to high evasion, even when
rates are low. ... A better way to meet revenue targets is to
encourage tax compliance by keeping rates moderate."
--High tax rates can reduce tax revenue.
"High tax rates do not always lead to high tax revenues. Between
1982 and 1999, the average corporate income tax rate worldwide fell
from 46 percent to 33 percent, while corporate income tax
collection rose from 2.1 percent to 2.4 percent of national income.
… Russia's … corporate tax rates fell from 35 percent
to 24 percent, and a simplified tax scheme lowered rates for small
business. Yet tax revenue increased -- by an annual average of 14
percent over the next three years. … Albania's corporate tax
revenue rose 21 percent after the rate was cut, while in Moldova it
jumped 28 percent and in Latvia, 37 percent.
In Romania, budget revenues grew 8 percent in real terms in the
first quarter of 2005 relative to the same period in 2004, despite
the new flat tax."
--Low-tax systems reduce corruption.
"Simplifying the tax regime by reducing tax rates and
eliminating exemptions is the main way to reduce corruption in tax
administration. Georgia -- which introduced major reductions in tax
rates and simplifications to the tax system in 2004 -- has seen a
drastic fall in perceived corruption of tax officials. In 2005 only
11 percent of surveyed businesses reported that bribery was
frequent, down from 44 percent in 2002. That was the sharpest drop
in perceived corruption among the 27 transition economies. Romania,
another major reformer in 2004, and Slovakia, which introduced
large tax reforms in 2003, also saw falls in perceived corruption:
from 14 percent to 8 percent of surveyed businesses and from 11
percent to 5 percent, respectively."
None of these statements are shocking. Ever since the Reagan tax
cuts triggered a global shift toward lower tax rates, the evidence
in favor of better tax policy has become overwhelming. But the
international bureaucracies have been hold-outs. Indeed, the
International Monetary Fund recently published a sloppy -- and
quickly discredited -- paper attacking the flat tax. The
Organization for Economic Cooperation and Development may be even
worse. This Paris-based bureaucracy actually has an anti-tax
competition project that tries to penalize nations with low tax
rates. The United Nations, meanwhile, has a crazy idea for global
This is why the World Bank report is newsworthy. For all intents
and purposes, the World Bank has broken ranks with the other
international organizations and decided to accept real-world
evidence about the benefits of low tax rates and fundamental tax
reform. It even endorsed Laffer Curve analysis because of the
overwhelming evidence that low tax rates result in more taxable
That may sound like common sense, but congressional Republicans
managed to hold power for 12 years without incorporating the Laffer
Curve into revenue-estimating models. Who would have thought that
the World Bank would wind up with better views on tax policy than
the Party of Ronald Reagan?
Mitchell is the McKenna senior fellow in
Political Economy at The Heritage Foundation.
First Appeared in FOXNews.com
International bureaucracies usually disdain free-market policies. So it’s remarkable to see the World Bank issuing a new report, Paying Taxes: The Global Picture, that unambiguously endorses low tax rates, simple tax systems and even the Laffer Curve.
Daniel J. Mitchell, Ph.D.
McKenna Senior Fellow in Political Economy
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