Over the last couple years we’ve occasionally chronicled how government financial policies can create flights of knowledge. Fundamentally people move to locales with lower taxes, they then create companies and labor pools and infrastructure, which creates wealth. You can see this at the state level with the net outflow from New York, New Jersey, and California to places like Nevada. You can see it at the national level with net ouflow of highly-educated professionals from France and Germany. Those knowledge migrations can create incredible strain, and a corresponding reduction in the standard of living, on the places they leave behind.
As we pointed out in our most recent post on the subject, many countries are doing something about it. At a time when a couple of the leading presidential candidates and the less financially literate side of the population are asking for higher taxes (ok, "letting tax cuts expire"), France, Germany, the UK, Switzerland, Singapore, most of eastern Europe, and even Sweden are cutting taxes. Especially corporate taxes, since they realize those business costs are simply passed along to consumers and also reduce the incentive to hire… a double whammy.
Now tack on a couple more. First Iceland.
Iceland is known as the Nordic Tiger because of rapid economic growth. Much of the nation’s prosperity is the result of free-market policies, including a 36 percent flat tax on labor income, a 10 percent flat tax on capital income, and a corporate tax rate of just 18 percent (down from 50 percent at the end of the 1980s). But Iceland is not resting on its laurels. The government has just announced a reduction in the corporate tax rate: The corporate income tax will be cut from 18 per cent to 15 per cent, effective for the 2008 income year and come into force in the 2009 assessment year.
And then there’s Taiwan.
Meanwhile, even though the 25 percent corporate tax rate in Taiwan is already substantially lower than the 39 percent-plus rate in the United States, Taiwanese politicians apparently recognize that globalization and tax competition are powerful arguments for even lower rates. Tax-news.com is reporting that the government therefore plans to slash the corporate rate to 17.5 percent – and also make unspecified reductions to personal income tax rates.
But in complete ignorance of the Laffer Curve, I guess some illiterati in the U.S. will continue to focus in the other direction. And then they’ll wonder why the country continues to lose jobs… and knowledge.
Addendum: Coincidentally the Wall Street Journal had an editorial yesterday commenting on this very subject, particularly in regards to Mr. Obama’s proposal to further increase the tax on corporations which he believes would somehow incentivize them to keep jobs in the U.S.. As the editorial notes:
If the U.S. didn’t impose the second highest corporate income tax in the world, companies would have less incentive to move jobs overseas. Rather than giving politically correct companies a 1% tax credit, it makes more sense to reduce the U.S. corporate tax rate for everyone – by at least 10 percentage points to the global average.
Economists have long understood that companies don’t really pay taxes; they merely collect them. A study by the American Enterprise Institute has show that U.S. workers bear the cost of the corporate income tax in lower wages and salaries. To borrow Mr. Obama’s language, what’s really unpatriotic is the 35% U.S. corporate tax rate.
And we wonder why more and more U.S. corporations are moving overseas, taking jobs with them.