Sunday

21st Jan 2018

Opinion

Why the EU should abolish corporate income tax

  • In reality, budget revenues from corporate income tax are moderate, due to a large variety of exemptions and derogations (Photo: Alan Cleaver)

The European Central Bank (ECB) recently announced it would buy various securities in order to inject more than €1 trillion into the European economy.

This move was long expected to counter exceedingly low consumer prices and the euro's high exchange rate vis-a-vis the currencies of our main trade partners.

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  • Governments which are implementing more dynamic economic policies are already trying to free businesses from their tax burden. (Photo: Joel Bombardier)

The European Commission is also developing a €315 billion investment package in the European transport, IT, and energy infrastructure sectors.

Both moves can help restore growth in the European economy.

But what about structural reforms?

Structural reforms have so far been limited to the austerity programmes forced on euro countries with debt and budgetary troubles who couldn’t have avoided default without EU help.

They are, understandably, extremely unpopular.

At the same time, European businesses, which are, in historical terms, a pro-European force, have voiced frustration over ever-multiplying regulations and shrinking market freedoms.

So how about taking some big steps to encourage entrepreneurship and to stimulate the private sector?

What could be done?

Ulterior motives?

We’ve had extensive discussions in the European Union about corporate income tax in recent years.

The commission has proposed the so-called Common Consolidated Corporate Tax Base. The idea is to have one methodology for all 28 member states on how to calculate corporate tax.

The reaction has been mixed, for various reasons.

It looks sensible to harmonise rules on the definition and calculation of corporate income tax, while leaving the level of the rates for member states to decide.

But there is suspicion that the exercise has an ulterior motive.

More market-oriented policymakers, especially those in economically more successful countries, fear harmonisation is designed to lead to higher taxes.

It wouldn’t be acceptable.

Meanwhile, the debate on corporate income tax is often too ideological.

Many people say big corporations should make big contributions to national treasuries for political reasons, for the sake of social justice.

But perhaps they could make a better contribution by creating jobs and decent salaries.

In reality, budget revenues from corporate income tax are moderate due to a mixed set of exemptions and derogations.

Governments which are implementing more dynamic economic policies are already trying to free businesses from their tax burden.

Go all the way

So, why not go the whole hog and abolish corporate income tax in all of Europe?

Or, at least, to park it at zero rates for the time being?

This would be a powerful stimulus to entrepreneurial activity, which so badly needed.

In Estonia, my home country, corporate income tax on reinvested profits was abolished in 2000 and this has worked very well in creating a more positive business climate.

The Europe-wide abolition of corporate income tax would be a good addition to the commission’s investment package and to the ECB’s shot in the arm for sovereign liquidity.

Siim Kallas is a liberal, former prime minister of Estonia. He served as Vice President of the European Commission from 2004 to 2014

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