NCPA - National Center for Policy Analysis


November 14, 2005

Many countries have cut their income tax rates in recent years to attract foreign investment and promote growth. The reforms in Eastern Europe have been particularly dramatic, with many countries adopting flat rate taxes for individuals. Countries in Europe and elsewhere have also made large cuts to corporate tax rates, says the Cato Institute.

The large benefits of cutting top income tax rates suggest that the trend will continue for some time. Nations are cutting rates to attract investment, reduce tax evasion, and make tax systems more fair and efficient. Here are some recent developments:

  • Israel is cutting its corporate rate from 34 to 25 percent and its top individual rate from 49 to 44 percent; Greece is cutting its corporate rate cut from 35 to 25 percent and is considering a flat tax for individuals.
  • Austria cut its corporate tax rate from 34 to 25 percent in 2005; Netherlands reduced its corporate tax rate from 34.5 to 31.5 percent in 2005 and is considering further cuts.
  • Germany's new conservative chancellor wants to cut tax rates, but even the former leftist chancellor had planned to cut the corporate rate to boost growth; France is planning to cut its top individual income tax rate from 48 to 40 percent.
  • Belarus is considering adopting a low-rate flat tax, like the one in neighboring Russia; Slovenia's leader plans to enact a flat tax after being inspired by Estonia's success.

In today's competitive global economy, policymakers need to respond to foreign reforms and cut U.S. income tax rates. As a first step, they should consider the recommendations of President Bush's Advisory Panel on Federal Tax Reform to cut the top individual and corporate rates to no more than 25 percent. If such reforms were enacted, it would help America regain its competitive edge and boost investment, wages, and growth, says Cato.

Source: Chris Edwards, "Catching Up to Global Tax Reforms," Cato Institute, Tax & Budget Bulletin No. 28, November 2005.

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