In the past number of weeks, there has been a great deal of mainstream media coverage, in both Canada and the United States, about federal government implementation of corporate tax cuts in an effort to both create jobs and to remain competitive so the jobs existing in both countries don’t go shopping for a more tax-friendly regime elsewhere. Governments are trying to convince voters of the validity of their "drop the taxes and they will come" philosophy when it comes to corporate taxes and jobs.
Let’s take a look at the corporate tax policy and unemployment in a country that has been in the news lately regarding its rather weak economy and its inability to manage its own debt, requiring a massive bailout – Ireland. I’ll compare Ireland’s experience with corporate tax levels and employment with its fellow European Union Member States.
Let me open this posting with the observation that Ireland’s current fiscal state is largely a product of an under-regulated banking sector and an over-heated housing market. Those issues may well have affected Ireland’s unemployment rate, however, one would think that if corporate taxes are low enough, that companies will continue to create jobs for non-domestic consumption; no matter how bad the local economic situation is, corporations should prefer to do business (resulting in the creation of jobs) in low tax regimes.
In the 27 countries that make up the EU, the average corporate tax rate in 2010 was 23.2 percent; this rate is down 8.7 percentage points from 31.9 percent back in the year 2000. To compare, the average personal income tax rate in 2010 was 37.5 percent, down 7.2 percentage points from 44.7 percent in 2000. The top three corporate tax rates are found in Malta (35 percent), France (34.4 percent) and Belgium (34 percent) and the lowest three corporate tax rates are found in Bulgaria and Cyprus (both 10 percent) and Ireland (12.5 percent). From the average corporate tax rates noted above, you can see that Ireland’s corporate tax rate is just over half of the average of all 27 EU Member States and third lowest overall.
The largest decreases in corporate tax over the past 10 years were recorded in Bulgaria (down from 32.5 percent to 10 percent), Germany (down from 51.6 percent to 29.8 percent) and Cyprus (down from 29 percent to 10 percent). Ireland’s corporate tax rate dropped from 24 percent in 2000 to 12.5 percent, a drop of 11.5 percentage points or 47.9 percent. In that period of time, Ireland’s personal income tax dropped by 3 percentage points or 6.8 percent from 44 percent to 41 percent. Corporations in Ireland are experiencing a massive drop in taxes at the expense of individuals who have barely seen their tax level budge. In fact, recent increases to Ireland’s VAT will pretty much negate any individual income tax savings. It’s always interesting to see how much of government’s revenue burden is being borne by individuals versus massive and highly profitable corporations.
Now let’s look at Ireland’s unemployment situation for September 2010 and compare it to all other EU Member States as well as the United States and Japan:
Here’s a map showing the same thing. The darker green colours show higher unemployment and the yellow colours show lower unemployment. Note again, that while Ireland isn’t the darkest green, it is a rather appropriate shade of green:
Here is the link for the chart that the unemployment graph data came from and here’s the chart showing the country-by-country monthly unemployment data for 2010:
I’m using the statistics from September 2010 since the country data is the most complete. For the month of September 2010, the average European Union (27 country) rate was 9.6 percent. The highest unemployment rate was 20.6 percent in Spain, second highest was Lithuania at 18.3 percent and third highest was Latvia at 18.2 percent. Ireland comes in with the 6th highest unemployment rate of 13.9 percent after the aforementioned Spain, Lithuania and Latvia as well as Estonia and Slovakia.
Now let’s look at the unemployment rates for the countries with the highest corporate taxes. Malta (corporate tax rate 35 percent) has unemployment of 6.5 percent, France (corporate tax rate 34.4 percent) has unemployment of 9.7 percent and Belgium (corporate tax rate of 34 percent) has unemployment of 8.4 percent. All three of these "corporate tax nightmares" have unemployment that is far lower than Ireland’s rate of 13.9 percent and in the case of Malta, less than half.
To summarize this data; Ireland has the third lowest corporate tax rate, well below the EU average, but has the sixth highest unemployment rate, well above the EU average. One cannot conclude that Ireland’s low corporate tax rate has not particularly led to job creation since the joblessness is, at least in part, due to other factors in the economy. As well, one cannot particularly conclude that the ultra-low corporate tax rate has bailed out Ireland’s economy by creating untold thousands of jobs, particularly now when the country needs jobs the most. Despite the very low tax rate in comparison to its neighbours, Ireland’s corporate tax policy is not benefitting the 13.9 percent of unemployed Irish workers. Yes, it is possible that Ireland’s current unemployment situation could be far worse without low corporate taxes but we’ll never know the veracity of that relationship just as we’ll never really know how much the low tax rate was actually responsible for job creation now or in the past. My suspicion is that the uncertainty of the relationship between corporate tax levels and job creation will apply to Canada and the United States as well.
Voters in Canada, the United States and other nations where governments are touting low corporate tax rates as the panacea for all the economic and unemployment woes facing their economies had better think twice when examining this issue. As seen from the example of Ireland, jobless rates are affected by many factors, corporate tax rates being only one of them. The best laid plans of government do not always come to fruition, and in this time of rapidly mounting deficits and debt, corporations should not be excused from paying their share of government revenues. It should not be the responsibility of individual tax payers to cover a larger proportion of government revenues while corporations use their tax savings to pad their profits and ultimately their share prices.
Nothing in economics is certain and the relationship between corporate taxation and job creation is no exception.
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