Lower corporate taxes pay off for both the state and the business community
A decrease in the corporate tax of just one percentage point increases investment in business and industry by 0.6 per cent.
Tax cuts pay for themselves. If Norway reduces its corporate tax, the result will be more tax income flowing to state coffers, because more people will invest money in Norwegian business and Norwegian jobs.
“But that’s only if other countries don’t follow our lead and lower their taxes correspondingly,” says Eero Tölö.
Tölö is a senior adviser at Norwegian Ministry of Finance. Along with researchers and economists at Statistics Norway and the German Riksbank, he has used new models to calculate what lower taxes on Norwegian companies would mean.
Moving to Norway
The new thing about these calculations is that they look at the consequences of foreign companies and investors moving to Norway. Foreign companies who move to Norway lead to greater investment in the country. They also bring more business to Norwegian companies, which allows them to be able to export more.
The figures show that if the tax on Norwegian companies were to be reduced by one percentage point — as of today, from 22 to 21 per cent — it would lead to an increase in investments on the Norwegian mainland by 0.6 per cent. Most of the increase would be due to more foreigners investing in Norwegian business.
Pays for itself
Not only that: the tax reduction would actually provide more revenue to the state.
“When we include the effects of foreign companies moving to Norway and the impact this has on domestic exports, the degree of self-financing increases to 124 per cent,” the report states.
This means that NOK 100 in tax relief means that the state gets NOK 124 more in taxes.
What’s important here is that these figures apply only if Norway reduces the tax without other country following suit, Tölö said. If other countries lower their corporate tax rate, the positive effect will be much smaller.
“When companies move from one country to another, it’s because of the differences between the countries. A single country can make money by cutting taxes. But if others follow this lead, then everyone ends up losing tax revenue,” Tölö said to sciencenorway.no.
He has calculated that effect, too. If the corporate tax is reduced both in Norway and in other countries, then investments in mainland Norway will increase by only 0.1 per cent.
This will nevertheless still provide some growth for the Norwegian business community, but it would also lead to lost tax revenue for the state, which means the government would either have to impose other taxes or reduce expenses.
In this case, the self-financing rate is only 57 per cent. This means that if the tax is reduced by NOK 100, the net cost to the state is NOK 43.
“Although it may be beneficial for a small, open economy to cut corporate taxes, our results show that it will be expensive if other countries do the same. Essentially, international companies lose the incentive to move,” Tölö and his colleagues concluded.
“At first glance, this looks like good, interesting work,” said Jarle Møen, a professor at NHH, the Norwegian School of Economics. Møen heads the Department of Business Administration at the school, and also sits as a Norwegian representative on the Nordic Tax Science Research Council.
Møen explains that this effect is the reason why the Norwegian government’s last tax committee — the Scheel committee — has given priority to reducing corporate tax. “A reduced corporate tax will stimulate both Norwegian and foreign investors to choose Norway as an investment country,” he says.
“The corporate tax in OECD countries has fallen over the past 20 years, and there is still a fairly intense competition over taxes. As a consequence, we probably shouldn’t anticipate an effect of 0.6 per cent, but perhaps 0.1 per cent,” Møen said.
Not as wealth tax
Nowadays, Møen has been deeply involved in the debate over the wealth tax after Prime Minister Erna Solberg visited the Norwegian salmon billionaire Gustav Witzøe.
“The difference between the wealth tax and the corporate tax is that the wealth tax doesn’t affect where you place your investments. Norwegians will be subject to a wealth tax whether they invest in Norway or abroad,” he says.
“The wealth tax affects the most solid companies. Companies with less equity find it more difficult to borrow money to finance their investments. They often rely on their profits after taxes to invest. They would benefit more from a reduced corporate tax than reduced wealth tax,” Møen said to sciencenorway.no.
Research and innovation are particularly difficult to finance though loans. In other words: A lower corporate tax makes it easier to spend money on innovation in your own business.
“And a corporate tax affects everyone, while cutting the wealth tax — to put it bluntly — first and foremost affects individuals who don’t need the help. If, for example, Gustav Witzøe, as the country's sixth richest man, has good ideas that he is unable to finance, that would be quite startling,” says Møen.
The entrepreneurs who don’t own enough to pay a wealth tax yet, on the other hand, would benefit from a lower corporate tax. Møen cites research that shows that these entrepreneurs plough more money back into strengthening their company if the corporate tax is lower.
Translated by Nancy Bazilchuk
Thomas von Brasch, Ivan Frankovic and Eero Tölö:Statistics Norway discussion paper number 955, ISSN: 1892-753X