Corporate Tax Cuts Are Spreading Across Europe

The lower house of the German Parliament last week passed a bill to cut 9 percentage points off its corporate tax rate by 2008.

The parliament backed Chancellor Angela Merkel`s plan of paring the EU’s highest corporate tax rate of 38.65%. The plan is aimed at attracting investment and preventing companies from moving operations overseas.

In March, Gordon Brown, the British Chancellor of the Exchequer and prime minister-in-waiting, announced a plan to lop two percentage points off the top rate, which is now 30 percent. Nicolas Sarkozy, who was elected French president this month, promised to reduce his country`s 33 percent rate by at least five percentage points.

The International Herald Tribune reported on May 28 that Eastern Europe’s tax rate-lowering movement is now taking hold in Western Europe. The title of the article was, “Tax-cut war widens in Europe.”

The rush to lower business taxes is a turnaround for the biggest European countries. Their governments once complained that their neighbors were engaging in "tax dumping" and threatened to cut aid to them. Just three years ago, Sarkozy, then the French finance minister, sought EU support to implement a minimum corporate tax rate throughout the bloc.

Low tax rates in Eastern Europe, which are less than 20 percent and smaller than the EU average, had substantial influence on the European economy. The lower rates helped lure operations from companies in higher-tax countries. PSA Peugeot Citroën, an automaker based in Paris, and Siemens, an engineering company based in Munich, for example, moved some production facilities to Slovakia.

Supporters of lower corporate taxes point to the success of Ireland, whose 12.5 percent rate, the lowest in the developed world, went down from 47 percent in 1988. That proved to be a magnet for such U.S.-based technology companies as Microsoft, Intel and Dell, and helped Ireland`s economy grow more than three times the rate of the euro area in the past decade.

The tax-cut move is pursued by both left and right wing governments. The Spanish government under Prime Minister José Luis Rodríguez Zapatero is cutting its rate to 30 percent from 35 percent. The prime minister of Italy, Romano Prodi, is also considering a reduction in his country`s 30 percent rate.

"Corporate taxes have been an important part of the story in strengthening growth" in Eastern Europe, said Philip Poole, head of emerging-markets research at HSBC in London. Western Europe countries posted a 2 percent growth rate, while those in the eastern part are growing at around 5 percent.

Moreover, statistics proved that reduced tax income is not of great concern. According to findings at KPMG International’s study of 86 countries last year, less tax income is offset by new revenue from expanded hiring and spending.