Tanzi (1987) studies the sweeping tax reform that occurs

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1 Tanzi (1987): A Retrospective Tanzi (1987): A Retrospective Abstract - This empirical research extends the work of Tanzi (1987) and provides comparative corporate income tax (CIT) rates for 29 different countries, spanning the United States, Europe, and Southeast Asia. A common worldwide trend in CIT rates emerges. During the period, the top CIT rate decreased by 11 percentage points in the United States, by an average of 11 percentage points in the European Union (EU) countries, and by an average of 9 percentage points in the Association of Southeast Asian Nations (ASEAN) countries. The research results are consistent with the international tax competition literature, particularly that of Gravelle (1986), which posits that a particular country s CIT rates are determined by not only such traditional factors as economic efficiency, administrative simplicity, and fairness, but also international consequences such as international CIT rates. Haroldene F. Wunder Department of Accountancy, California State University, Sacramento, Sacramento, CA National Tax Journal Vol. LIV, No. 4 INTRODUCTION Tanzi (1987) studies the sweeping tax reform that occurs in 14 industrially developed countries (the Tanzi 14) during the mid 1980s and concludes that (1) tax reform in other countries was concurrent with, and not a response to, the U.S. Tax Reform Act of 1986 (TRA 86), (2) the international tax reform in the mid 1980 s was characterized by a reduction in income tax rates and a broadening of the income tax base, and (3) a movement exists toward a greater reliance on indirect taxes, e.g., value added taxes. Tanzi s (1987) research occurs immediately after the U.S. TRA 86 and concurrent with its implementation. He acknowledges that very little time has passed since that Act was enacted into law (Tanzi, 1987, p. 339). The current descriptive research extends his study of the Tanzi 14 by an additional 12 years, to include This research also presents historical rates in the European Union (EU) and the Association of Southeast Asian Nations (ASEAN) to determine the extent to which the Tanzi 14 trend is representative of a worldwide trend in income taxes. Specifically, this research s objectives are to: Present and discuss corporate income tax (CIT) rates in the Tanzi 14; Present and discuss the corporate income tax rates in the 15 EU and nine ASEAN countries; and Show that tax reform in the countries studied is consistent with the concept of international tax competition. 763

2 NATIONAL TAX JOURNAL Although others have noted particular aspects of country specific tax reform, a long term, systematic study of CIT rates across multiple countries is lacking. This descriptive research represents such a systematic study by providing and discussing 29 countries CIT rates for the 15 year, period. Although this research does not provide unique analysis of why the observed tax reform trends occurred, its results support the analyses of Tanzi (1987) and others (e.g., Killingsworth, 1983; OECD, 1986; Sorensen, 1998). They provide ample evidence that tax reforms in various countries reflected common principles and the converging view that lower rates levied on broader bases would result in fairer tax systems. As to the first research objective, this study extends Tanzi s (1987) research by 12 years and evaluates his expectations about the trend in CIT rates, which are most easily analyzed because their structure is, in general, more straightforward than that of individual income tax. In many countries, the top corporate rate reflects the entire corporate rate structure. Although Tanzi (1987) provides information about other types of taxes for different subsets of the Tanzi 14, it is only the CIT for which he provides a set of existing and predicted rates for all 14 countries. As to the second objective, this research studies CIT tax reform from 1987 through 1999 in the 15 EU and the nine participating ASEAN countries to establish the degree to which the Tanzi 14 CIT reform is representative of worldwide tax reform. The EU is particularly relevant to this research because 11 of its members have formally expressed their common economic and monetary goals by joining the European Monetary Union (EMU). The ASEAN countries are relevant because they represent some of the most rapid economic and fiscal development in the world. This research is organized as follows. The next section presents and discusses the CIT rates in the Tanzi 14. The third section presents and discusses the CIT rates of the 15 EU and nine participating ASEAN countries. The fourth section shows how the trend in CIT rates is consistent with the concept of international tax competition. Conclusions appear in the last section. THE TANZI 14 The Tanzi 14 consist of: Australia, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, Sweden, New Zealand, the United Kingdom, and the United States. Tanzi (1987, p. 348) provides actual CIT rates and expected CIT rates for all 14 countries. The data in Table 1 compare Tanzi s (1987) projected 1989 corporate rates with actual 1989 rates, using the actual top 1987 CIT rate as the baseline. The first two columns in the table are from Tanzi (1987, p. 348) and show the actual top 1987 CIT rate in each Tanzi 14 country and Tanzi s projected top 1989 CIT rate in each country. The third column presents the actual top 1989 CIT rate in each country. The data support Tanzi s (1987) expectation about the trend in rates, i.e., that they would either remain constant or decline. Rates remain stable in six countries (Denmark, Finland, France, Italy, Sweden, and TABLE 1 COMPARISON OF TANZI S (1987) PROJECTED 1989 CIT RATES AND ACTUAL 1989 CIT RATES (BASELINE=1987) Country Australia Canada Denmark Finland France Germany Ireland Italy Japan Netherlands New Zealand Sweden United Kingdom United States Average Actual Projected Actual

3 Tanzi (1987): A Retrospective the United Kingdom). They decline in the remaining eight (Australia, Canada, Germany, Ireland, Japan, Netherlands, New Zealand, and the United States). Four countries actual 1989 CIT rate is lower than Tanzi s projected rate. The most notable disparity between actual and projected rates occurs in New Zealand, where the actual 1989 rate of 28 percent is 20 percentage points below the projected 48 percent rate. The actual 1989 corporate rates for Australia, Canada, and the Netherlands are also lower than the projected rates. Tanzi (1987) correctly predicts that Ireland s top CIT rate would decline from 1987 to 1989; however, the decline is not as rapid as expected. This research now extends the temporal horizon of the Tanzi 14 by 12 years and provides each country s top CIT rate for the period. Table 2 contains the corporate income tax rates for the Tanzi 14. All Tanzi 14 countries corporate income tax rates decline significantly during the period. Most rate declines began by Although tax rate patterns are country specific, the average corporate rate of the Tanzi 14 begins a continual declining trend in It stands at 33.0 percent in 1999 a 13 percentage point decline. Ten countries experience double digit rate declines from 1985 through Sweden s 24 percentage point rate decrease dominates. The smallest rate decline (6 percent) occurs in Denmark and Germany (i.e., German rate on distributed earnings). Tanzi s (1987) expectations about trends in CIT rates in the Tanzi 14 are correct. The decline in rates that he predicts materializes and, in many countries, is more pronounced than expected. EU AND ASEAN RATES This section presents and discusses the trend in CIT rates for the 15 EU member states and the nine participating 765 ASEAN members to ascertain if a worldwide pattern in income tax rates has emerged since the mid 1980 s. European Union (EU) Table 3 contains the top CIT rates of the 15 EU member states for the period. The top CIT is representative of the entire corporate income tax regime since all EU countries, except the United Kingdom, impose a flat CIT rate. Italy s CIT reform (particularly during and discussed below) is noteworthy because it is counter to that of the other 14 EU countries. Italy s inclusion in the annual mean CIT rates masks somewhat the trend for the EU sample as a whole during the study period. The magnitude and trend in EU corporate income tax rates for the period are very similar to those of the Tanzi 14. The significant rate reductions in Finland and Sweden (15 and 24 percentage points, respectively, from 1985 to 1999) are the most vivid examples of recent tax reform in the Nordic countries, which have followed the philosophy of tax cut cum base broadening which became popular in many other OECD countries during the second half of the 1980s. (Sorensen, 1998b, p. ix). Sorensen illustrates the Nordic experience by example when he states that the base broadening measures involved in the Swedish tax reform of 1991 amounted to 6 percent of gross domestic product, whereas the much celebrated US tax reform of 1986 only implied a reshuffling of 1 2 percent of GDP (1998b, p. ix). The German tax reform experience stands in contrast. Its historically high rate on undistributed earnings increases the average Tanzi 14 and EU CIT rate in each year. Although Germany has steadfastly maintained its relatively high corporate income tax rate on undistributed earnings, German tax reform appears imminent. Other examples of EU corporate

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6 tax reform occur in Denmark and Ireland. Both countries are reducing their corporate rates, effective for 2000, to 32 and 24 percent, respectively. Italy s CIT reform is counter to other EU countries from 1985 through From 1985 through 1996, Italy increases its corporate rate from percent to percent to bring Italy s deficit to compliance with European Monetary Union (EMU) limits. In 1997, Italy joins the European tax reform movement and begins reducing rates. Association of Southeast Asian Nations (ASEAN) To determine if Tanzi s (1987) CIT rate projections can be generalized beyond Europe, Table 4 presents CIT tax rates for the nine participating ASEAN countries. When the EU and ASEAN countries are compared over the 15 year period, the maximum between sample annual difference in rates is 6.0 percentage points, all occurrences of which are before After 1989, the maximum difference is 4.0 percentage points, which occurs in 1999 when ASEAN member Vietnam reduces its CIT rate to 30 percent. Comparing the 15 year longitudinal averages of the EU and ASEAN samples, the between sample difference in rates is a mere 3 percentage points. While the annual average CIT rates in the two samples are similar, the data show a more uniform set of per country CIT rates in the ASEAN. For example, both Brunei Darussalam and Thailand impose a 30 percent CIT rate for the entire 15 year period. Singapore and Myanmar are the only ASEAN countries to engage in significant rate reductions similar to those in the EU. Indonesia and Laos do not engage in any CIT rate reductions until In contrast to the Tanzi 14 and the EU countries, ASEAN corporate income tax rates are relatively low in the mid 1980s when the trend toward lower rates begins to 768 NATIONAL TAX JOURNAL emerge in the United States and Europe. By 1999, however, the average corporate rates in all three samples are very similar, as demonstrated below: Sample 1999 Average Corporate Rate Tanzi EU 34.0 ASEAN 30.0 INTERNATIONALTAX COMPETITION Tax competition results when the tax system of one governmental unit affects the tax system of another governmental unit, typically through an effect on the second entity s tax revenues (Goodspeed, 1998, p. 580). The tax literature is replete with recent research on the subject (e.g., Wilson, 1999; Desai, 1999; Goodspeed, 1998; Altshuler, Grubert, and Newlon, 1997; Edwards and Keen, 1996; Billings, Bajor, and Gourdji, 1990; Bovenberg, 1989; and Gravelle, 1986). The data in this research are consistent with Gravelle s (1986, p. 383) and others conclusions that a particular country s CIT rates are determined by reference to not only such traditional factors as economic efficiency, administrative simplicity, and fairness, but also international consequences such as international CIT rates. CONCLUSIONS Tanzi s (1987) expectation about the trend in CIT rates is correct. In the Tanzi 14 and EU countries, the tax reform movement that began in the mid 1980s has resulted in corporate rate reductions of 13 and 11 percentage points, respectively, from 1985 through Most rate reductions are evident by 1989, and several are more pronounced than Tanzi (1987) expects. Although the average annual EU and ASEAN rates are similar, the ASEAN tax reform experience differs temporally from that of the EU. ASEAN CIT rates are more stable across the research period.

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8 NATIONAL TAX JOURNAL All three samples show a trend of declining CIT rates from 1985 through The average rates in the Tanzi 14, EU, and ASEAN decline from 1985 through 1999 by 13, 11, and 9 percentage points, respectively. Acknowledgments I wish to thank the editor and two anonymous referees for their helpful comments. REFERENCES Altshuler, Rosanne, Harry Grubert, and T. Scott Newlon. Has U.S. Investment Abroad Become More Sensitive to Tax Rates? NBER Working Paper No Cambridge, MA: National Bureau of Economic Research, Billings, Anthony, Larry Bajor, and Al Gourdji. Competitive Tax Disadvantages Faced by U.S. Multinationals: How to Address Them. Columbia Journal of World Business 25 No. 4 (Winter, 1990): Bovenberg, A. Lans. The Effects of Capital Income Taxation on International Competitiveness and Trade Flows. American Economic Review 79 (December, 1989): Desai, Mihir A. Are We Racing to the Bottom? Evidence on the Dynamics of International Tax Competition. In Proceedings of the Ninety First Annual Conference on Taxation, National Tax Association, Edwards, Jeremy, and Michael Keen. Tax Competition and Leviathan. European Economic Review 40 No. 1 (January, 1996): Goodspeed, Timothy J. Tax Competition, Benefit Taxes, and Fiscal Federalism. National Tax Journal 51 No. 3 (September, 1998): Gravelle, Jane G. International Tax Competition: Does It Make a Difference for Tax Policy? National Tax Journal 39 No. 3 (September, 1986): Killingsworth, Mark R. Labour Supply. Cambridge: Cambridge University Press, OECD. Income Tax Schedules, Distribution of Taxpayers and Revenues. Paris: OECD, Sorensen, Peter Birch. Nordic Tax Policy Towards the Year 2000 and Beyond. In Tax Policy in the Nordic Countries, edited by Peter Birch Sorensen, London: MacMillan Press Ltd., 1998a. Sorensen, Peter Birch. Preface. In Tax Policy in the Nordic Countries, edited by Peter Birch Sorensen, ix xi. London: MacMillan Press Ltd., 1998b. Tanzi, Vito. The Response of Other Industrial Countries to the U.S. Tax Reform Act. National Tax Journal 40 No. 3 (September, 1987): Wilson, John Douglas. Theories of Tax Competition. National Tax Journal 52 No. 2 (June, 1999):