Global Economic Lessons for Oregon
By Taxpayer Foundation of Oregon, 10/08
“In the decade before 2005, American consumers were the growth engine for the world economy, accounting for more than half of global consumer spending. The balance of power is now shifting.”
– Dave Have, Wall Street Journal
The world is changing economically very quickly and Oregon can learn many lessons. We have unexpected nations experiencing blossoming growth and we have leading industrialized nations stagnating. For each nation there are important policy and taxation experiments that our State can benefit from. Below is a nation-by-nation example of some of the world’s most significant economic changes.
Ontario and Quebec once reigned supreme as the economic hub of Canada. This is no longer the case. The western provinces of British Columbia, Alberta, and Saskatchewan are rapidly taking their place. Western Canadian governments of all political stripes have reduced marginal personal income tax rates and overall business taxes. The tax policies pursued by western Canada over the past few years are quintessentially supply-sided. That is, the tax relief is largely focused on improving incentives for work, savings, investment, and entrepreneurship.
Alberto led the way in 2000 by creating Canada’s only single-rate personal income tax—10%. British Columbia and Saskatchewan soon followed by substantially reducing their personal income tax rates. Top marginal rates in there two provinces were reduced to 14.7% and 15%. Compare that to Ontario’s top marginal rate of 17.4% or Quebec’s 19.2%. Canada’s three western provinces now have the lowest top marginal rates in the country. The changes to personal income taxes were matched, perhaps more importantly, by reductions in business taxes.
The economic results of tax reform based on improved incentives have been stunning. Over the past three years, British Columbia has grown 3.4% a year on average; Alberto 4%; and Saskatchewan 3.5%, all easily outperforming the Canadian average of 2.6% a year over the same period.
Growth in the three provinces also outpaced U.S. national average for the past two years. Among Canadian provinces and the 50 American states, Alberto ranked seventh in growth, British Columbia ninth, and Saskatchewan 17th. This strong performance occurred within a federal environment that is not as conductive to economic growth and development as that of the U.S.
Perhaps the success of western Canada will entice other provinces…and even some states to the south that have poor tax structures to join the bandwagon of prosperity by implementing incentive based tax relief and freer trade.” (Niels Velduis, 7/18/2006, The Wall Street Journal)
“In 1965, government spending as a percentage of GDP averaged 28% in Western Europe, just slightly above the U.S. level of 25%. In 2002, U.S. taxes ate 26% of the economy, but in Europe spending had climbed to 42%, a 50% increase. Over the same period of time, unemployment in Western Europe has risen from less than 3% To 8% today, and to nearly 9% for the 12 countries in the euro zone. These two phenomena are related; in a country with generous welfare benefits, rising unemployment increases government spending rapidly.” (Brian M. Carney, 5/9/2005 “Europe Hasn’t Outgrown ‘that ‘70s Show,’” Wall Street Journal).
France and Germany have grappled with over-extended pension system and debt. The Public debt in France in 2007 was at 67% which was five times as higher than the level in 1980 . For Germany, their 2007 public spending on pensions was among the highest when compared to 30 other nations in the Organization for Economic Co-operation and Development .
Regulations are also damaging to Western Europe. In 1998 France introduced the highly controversial 35-hour workweek limit. By 2005 this law, which stunted young entrepreneurs, was re-visited and rolled back . Early retirement packages where, for instance, government train operators could retire at age 50, were public examples of a public retirement system gone haywire . Changes to these pension programs would result in massive nationwide protests, sometimes resulting in crowds over a million protesters.
Consider Ireland. In 2000 that small country of 3.8 million people attracted more foreign direct investment (FDI) than either Japan or Italy. The main draw for foreign investors has been a 10 percent corporate tax rate on manufacturing, financial services, and other activities. As a result, Ireland has boomed and now has one of the highest standards of living in the world. A United Nations report called Ireland “the most dynamic country in the developed world in terms of recent growth and competitive performance” and hailed its change from “a backward low-productivity economy into a center of technology-intensive manufacturing and software activity.”
Empirical research finds that FDI is becoming more sensitive to taxation.
Indeed, empirical research finds that FDI is becoming more sensitive to taxation. In a new compilation of studies on the issue, Editor James Hines of the University of Michigan Business School concludes that “recent evidence indicates that taxation significantly influences the location of FDI, corporate borrowing, transfer pricing, dividend and royalty payments, and research and development performance.” A study by Rosanne Altshuler, Harry Grubert, and Scott Newlon found that U.S. multinationals became more sensitive to taxes on FDI between 1984 and 1992. For 1992, their results suggest that countries with tax rates 10 percent higher than those of other countries received 30 percent less U.S. FDI, controlling for other factors. Results from other studies have found lower but still substantial behavioral responses. The authors note that “most recent studies indicate that taxes exert a strong influence on location decisions.”
Similarly, a recent IMF study found “strong evidence” that direct investment flows are affected by tax systems. The study’s results showed that lower-tax countries had larger inflows of FDI
U.S. Foreign Portfolio Investment Flows
Four European countries with favorable tax regimes— Ireland, the Netherlands, Luxembourg, and Switzerland—accounted for 9 percent of European GDP but attracted 38 percent of U.S. FDI to Europe between 1996 and 2000. Evidence also indicates that taxes affect FDI flows at the subnational level. One recent study found that U.S. states with higher taxes attract fewer new investments and plant expansions from foreign corporations than do lower-tax states.
Top Corporate Income Tax Rates
(percent), 1986–2000 (national-level taxes only)
Country –1986 /1991 /1995 /2000 /1986–2000
Australia –49/ 39 /33/ 34 /-15
Austria –30 /30/ 34/ 34/ 4
Belgium –45 /39/ 39/ 39/ -6
Canada –36 /29/ 29/ 28 /-8
Denmark –50/ 38 /34 /32 /-20
Finland –33 /23 /25 /29/ -4
France –45/ 42/ 33 /33 /-12
Germany –56/ 50/ 45 /40/ -16
Greece –49/ 46 /40 /40 /-9
Iceland –51/ 45/ 33 /30 /-21
Ireland –50/ 43/ 40 /24/ -26
Italy –36 /36/ 36/ 37 /1
Japan –43 /38 /38 /27 /-16
Korea –30 /34/ 32/ 28/ -2
Luxembourg –40 /33 /33 /37/ -3
Mexico –34/ 34/ 34/ 35 /1
Netherlands –42 /35 35 /35 /-7
New Zealand –45 /33/ 33 /33 /-12
Norway –28 /27 /19/ 28 /0
Portugal –47 /36/ 36/ 32 /-15
Spain –35/ 35/ 35/ 35 /0
Sweden –52 /30/ 28/ 28 /-24
Switzerland –10/ 10 /10/ 8/ -2
Turkey –46 /49 /25/ 33 /-13
U.K. –35 /34 /33 /30/ -5
United States –46 /34/ 35/ 35 /-11
Average for 26 OECD countries 41/ 35/ 33/ 32/ -9
Source: OECD, “Tax Rates Are Falling,”
OECD in Washington, March–April 2001.
The combined U.S. federal and average state corporate tax rate of 40 percent is currently higher than the rates in all but 3 of 30 OECD countries. Effective corporate
rates have also been falling in Europe.
In 2000, the consumer spending of the world’s 17 largest emerging-market countries was equal to 48% of U.S. consumer spending; last year it was equal to 65%. At current growth rates, the developing countries could exceed U.S. consumer spending by 2015. This consumption boom is changing global trade patterns. America’s share of global imports has fallen 14% last year from over 20% in 2000. The import share of the developing countries has grown to 40.6% last year from 33 in 2000.” (David Have, “Brave New Economy,” 3/22/08 Wall Street Journal)
Paying Taxes — Where it’s easy, where it’s not
Cen. African Rep.
Source: World Bank Group and PricewaterhouseCoopers
The general rule that is illustrated by the experiences of Canada, Western Europe, Iceland, Ireland, and the United States seems to be as follows: reduce taxes in order to reduce wage costs, tighten rules on government benefits, loosen mandatory employment benefits, and loosen up employment protection laws.