Global Economy Booms as Taxes Fall

By SHARE

"This is far and away the strongest global economy I've seen in my business lifetime," is how U.S. Treasury Secretary Henry Paulson recently described the current global boom. Hyperbole? Actually, that dramatic declaration probably understates things. Let's refer back to this piece of analysis from Paulson's old firm, Goldman Sachs: "If we and the consensus are correct, then the period 2003-2008 will have been one of the most powerful periods of economic growth globally since accurate data [have] been collectible for much of the world."

Indeed, the global economy is growing at about a 5 percent annual pace, according to the International Monetary Fund, after growing 4.9 percent in 2005 and 5.4 percent last year. By contrast, the global economy grew at a 3 percent pace from 1980 to 2000 and at 4.7 percent from 1960 to 1980.

But one thing making the current world economy more impressive today is that gross global product is three times as big as it was in 1970, when adjusted for inflation. (We're growing off a much bigger base.) And before that? According to the Federal Reserve Bank of Minneapolis, "The first 60 years of the 20th century saw average annual global growth rates of 2.4 percent, of 1 percent for the entire 19th century, of one-third of 1 percent for the 18th century."

This is the story of globalization, of free trade, of the Internet, of China, of India. Then there's this: The 21st century has also seen a global effort to reduce tax rates. Since 2000, according to the Tax Foundation, more than half the countries in the Organization for Economic Cooperation and Development—the group of 30 nations that includes most of America's major economic competitors—have lowered their top marginal rates, reducing the OECD average rate from 45.93 to 42.95 percent.

The group goes on to examine possible future trends, including what happens if the Bush tax cuts are left to expire at the end of 2010 or if a 4 percent tax surcharge is imposed on wealthier Americans to pay for reform of the alternative minimum tax:

The U.S. reduced its top rate by over 13 percent between 2000 and 2006, dropping it from 15th to 21st in the rankings. If no other country had reduced its tax rates, the U.S. would stand at 26th highest, but the strong tax-cutting trend in other OECD countries blunted the impact of the 2001 rate cuts. . . . Full repeal of the 2001 rate cuts after a surcharge to fix AMT would move the U.S. from 21st to 9th highest in the rankings—and that assumes the tax cutting abroad comes to a halt. A repeal of the 2001 tax cuts with no AMT surcharge would move the U.S. to 11th highest, while an AMT surcharge alone would move the U.S. to 14th highest. In all three cases, the U.S. would rank higher than it did in 2000 (15th), before the passage of the 2001 tax cuts.

I wonder what would happen if all the industrialized nations decided to start raising taxes? It might make the U.S. more competitive with them on a relative basis, but how would it affect global economic growth?

Yet there seems little chance of that happening, given the global competitive race, in which making your country more attractive to financial and human capital is critical. Examples like Ireland, where tax cutting has accompanied a huge economic boom, are too powerful to ignore.

So it looks as though the high-tax experiment might be confined to America, which by the way already has the second-highest corporate tax rate.

TAGS:
corporate taxes
globalization