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Getting the most out of business taxes

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ONE of the hottest debates in economic policy at the moment is how to ensure companies are paying the optimal amount of tax. On the right, politicians think that a lower corporate-tax rate will lead to more business investment and thus faster economic growth. Hence the initial stockmarket enthusiasm after President Donald Trump was elected on a platform that included cuts in business taxes. On the left, the belief is that business is not paying its “fair share” of tax and that it can be further squeezed to pay for spending commitments. Hence the promise of the Labour Party in Britain’s recent election campaign to push the corporate-tax rate up to 26% (from 19%).

How do these theories translate into practice? To find out the effect on business investment, The Economist took the corporate-tax rates in OECD countries and divided them into quartiles from highest (1st) to lowest. Then we calculated the five-year average in each quartile for gross…Continue reading

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