The world is paying more taxes despite tax cuts

Singapore

THE year may not be over, but 2018 has already brought with it a slew of significant tax reforms, heralding a change in the direction of tax policy as governments across the globe take action to boost not just investment and consumption, but also equity across income groups.

The year's tax reforms were covered in the Tax Policy Reforms 2018 report put out by the Organisation for Economic Co-operation and Development (OECD), which looks at tax changes across its 36 member states, as well as Argentina, Indonesia and South Africa.

Interestingly, despite income-tax cuts in numerous countries, the bulk of those covered in the report have experienced an increase in taxation in the past decades, noted Schroders Investment Management (Singapore) Limited.

Its Talking Point note, titled "Seven surprising facts about tax revenues around the world" and published on Thursday, analysed the findings in the OECD's report.

One notable trend is the acceleration of an already-ongoing trend - corporate income tax (CIT) cuts.

Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, said: "Among the countries that introduced significant corporate tax reforms were a number with high corporate tax rates, where tax reform was long overdue.

"While these corporate tax cuts have created some concerns of a 'race to the bottom', most of these countries appear to be engaged in a 'race to the average', with their recent corporate tax rate cuts now placing them in the middle of the pack. We will be closely watching how other countries respond to this trend."

The average corporate income tax rate across the OECD has dropped to 23.9 per cent in 2018, from 32.5 per cent in 2000.

Last year, eight countries implemented CIT rate cuts, averaging 2.7 percentage points; this year, eight countries reduced their CIT rates, averaging a 4.8 percentage point decrease.

Belgium, for example, reduced its statutory CIT rate this year to 29 per cent, from around 34 per cent, with further reductions to 25 per cent expected in 2020.

France will phase in a CIT rate cut to 25 per cent, from 33.3 per cent, between this year and 2022.

The United States boasted the most dramatic rate reduction, cutting its federal CIT rate to 21 per cent from 35 per cent under its Tax Cuts & Jobs Act, which was signed into law last December.

Despite what it describes as "a savage decline" in CIT rates over an extended period of time, Schroders noted that governments' CIT revenue has actually gone up in the past few decades.

It added that it was worth noting that higher pre-tax profits earned by companies over the years have increased overall CIT revenues, despite the lower tax rates.

The phenomenon is somewhat acknowledged by the OECD in its report, which said that "interestingly, CIT revenue trends seem to have been little affected by the progressive decline in CIT rates" and that, in recent years, "CIT revenues as a share of GDP have picked up in a majority of countries".

The OECD suggests that "cyclical upturns (in the macroeconomic environment) have contributed to increases in CIT revenues in a number of countries".

Schroders also notes in its report that the overall tax collected by governments has, in fact, increased since 1990; about 80 per cent of the countries covered in the OECD's report experienced an increase in taxation between then and 2016.

Higher tax income across all major sectors, particularly value-added tax (VAT) and CIT, has pushed the ratio of tax to GDP to a record high of 34 per cent, it said.

The boost to tax revenue, despite cuts in CIT rates, could also stem from CIT's contribution to government revenue continuing to remain low, especially when compared to other tax-revenue contributors like personal income tax, social security and VAT. VAT and other goods and services taxes contribute a far higher amount to government coffers, Schroders said.

And that may also be why jurisdictions continue to be bold in CIT reform and rate cuts.

Schroders' head of Research and Analytics, Duncan Lamont, said: "Given its low contribution to overall revenues, cutting (CIT) is a far less directly costly move than cutting (personal) income tax, despite growing public opposition. Governments also hope that cutting tax rates for companies encourages them to base or expand their presence in a country, employing people who pay income tax and who buy taxed goods and services."

Schroders noted that the income-tax burden, relative to GDP, has not increased in most countries since 2000; tax hikes have instead been coming via indirect taxes, in the form of VAT and social security contributions, which is where most tax payers feel the increase in their tax burden.

The OECD report said VAT rates stabilised across the globe in 2018, with South Africa being the only country where the standard VAT rate was raised.

Already-high VAT rates have led many countries to look for alternative ways of raising additional VAT revenues, most notably through tax administration and anti-fraud measures.

The OECD also noted that many jurisdictions cut personal income taxes in the past year - not so much to become more appealing to tax payers, but to alleviate the burden on low- and middle-income earners. It said a common strategy among countries has been to increase earned income tax credits, which achieves the dual goals of improving labour market participation and enhancing the progressivity of the tax system.

Mr Saint-Amans concluded: "As economic times improve, fiscal policy choices should avoid the risk of excessive pro-cyclicality and focus on supporting the longer-term drivers of growth and equity."