This note is based on the preliminary proposal for a reform of the corporate income taxation in Portugal.
The subtitle of the
proposal states the scope of the reform: to improve competitiveness, increase
growth and create employment. To achieve the latter goals the proposal stands
on three elements. First a simplification of the IRC code, the fiscal-legal element.
Second a gradual and certain decrease in the tax rate, the budget-macro element.
Third a corporate tax coherent with the new international environment, the
international cooperation element.
The legal-fiscal dimension is the central focus
of the proposal. The authors have produced an impressive and detailed code that
contains new articles and alterations to the older ones. Being a macroeconomist
with a weak understanding of the legal technical language, I am not in measure
of evaluating the contents of these articles. Surely the objectives of
simplification and increased efficiency are of primary importance. Overall
given the background of the commission this appears to be the strong element of
The budget-macro dimension is weaker. The key point of the document is the large
decrease in the average corporate tax rates across the OECD and G20 countries
that went from 40.9 percent in 1990 and decreased to 26.3 percent in 2013. The
authors maintain that this decrease has caused growth, investment, employment
and a reduction of tax fraud. To strengthen the causal link they present
several graphs showing a negative correlation between the tax rates and tax
revenues. The idea is that the reduction in the tax rates has increased the
revenues partially through a broadening of the tax basis and especially in
response to a “virtuous” supply side mechanism (that also caused growth,
investment and employment). The analysis should be more nuanced. The international
reduction in corporate tax rates started 30 years ago is most likely a response
to the greater mobility of capital. Increased profitability in the corporate
sector explains, at least partially, why revenues as a percentage of GDP did
not decrease despite the reduction in rates. The large increase of the
financial sector during this period is also part of the explanation. The
authors recognise that beyond the stylised evidence presented, no evaluative
research to legitimate the practical implications on competitiveness, growth
and employment of the proposal has yet been done.
The budget implications have been quantified for three different scenarios and are approximately 220 million euro per year, with a 5 years cumulative effect on fiscal revenues in the range of 1200-1400 million euro. The quinquennial horizon of the reform responds to the necessity of spreading the loss in tax revenues during this period of budget consolidation. A legitimate question is to ask if the decrease of the corporate tax rate from 31.5% to 19% that costs 220 million euro per year is welfare superior to different proposals such as decreasing the tax on labor. It might well be that this is actually the case but evidence would be welcomed.
The international cooperation dimension suggested is the one
I more tenaciously debate. The stance of the reform is the one of a realist
state-centric small economy. Somewhat a paradoxical posture for a European
country, especially when the G20 is pushing for new international standards to
be designed to ensure stronger coherence of corporate taxation across
countries. The OECD, called to develop an action plan, has heralded the
proposal of cooperation a “once in a century” opportunity to fix a creaking
taxes system. Critics will call it a rhetorical statement and that taxation is the
last line of defence of countries sovereignty. Perhaps, but I believe that only
through cooperation, nation states, especially the small and medium sized, will
be able to maintain their sovereignty.
Ultimately the Portuguese authorities
want to implement a corporate tax reform to increase the welfare of all
Portuguese citizens. Trade-offs are present: fiscal stability versus stimuli
effects, allocational efficiency between capital and labor, short term versus long-term
effects. Overall the case on the desirability of the reform can be made. I
would suggest changing the methodology and riding the opportunity given by the
G20-OECD action plan on corporate income tax reform. Become the first mover to
launch and implement the coordinated plan. This could be the stance of a
cosmopolitan nation state.