COMPARING CAPITAL TAX RATES
October 27, 2005
A new study from the C.D. Howe Institute investigates how tax rates on capital vary by country. The simplest way of comparing countries' capital taxation would be to look at statutory tax rates on corporate income, however, that misses a lot of factors that affect the taxes firms actually pay. Governments use different rules for the treatment of depreciation, inventories and other things. All of these cause actual tax rates to diverge from the statutory figures.
The authors calculated a ranking according to the "effective" tax rate -- the proportion of the pretax return on capital swallowed by the state. They found:
- China has the highest effective tax rate, because of a 17 percent value-added tax on purchases of machinery and equipment.
- Although Canada has a low statutory tax rate on corporate income, high capital and sales levies on inputs by its provincial governments lift its effective rate.
- Despite being a very high tax state, Sweden allows fast write-offs for capital investment.
- Singapore and Hong Kong also offer liberal deductions and concessions that yield more favorable tax regimes.
The authors note that other factors affect investment returns: differences in market size, labor costs, the quality of infrastructure and political stability. Still, the authors believe that taxes do matter. As China and India develop, industrialized countries with high corporate tax rates will be less attractive to foreign investors.
Source: "Taxing times: A study of corporate taxes yields some unexpected results," Economist, September 24, 2005; based upon: Jack M. Mintz, Duanjie Chen, Yvan Guillemente and Finn Poschmann, "The 2005 Tax Competitiveness report: Unleashing the Canadian Tiger," CD Howe Institute, September 2005.
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