By Daniel Archibald | CFA
Governments and their social programs around the world function primarily as a result of the collection of taxes from a few key sources. The most common taxpayer is the individual citizen, who is also the main beneficiary of the Government's spending. Another major taxpayer and source of revenue for many Governments are the corporations which do business in some way inside of the country's borders.
Individuals are generally taxed in two main ways - income tax and sales tax. In most jurisdictions around the world, income is taxed progressively and is based on the residence of the individual. Sales tax on the other hand is generally a flat tax based on the location of the sale of the good or service. Corporate tax in most countries, like sales tax, is generally levied on profits of companies based on where earnings are generated. Some exceptions to this tax regime type for corporates are tax havens with no tax on profits, and, up until recently, the US, which taxed corporates based on where they were located (similar to residence-based taxes for individuals).
Along with moving to a source-based corporate tax system, the US has also dropped its tax on corporates from one of the highest in the world to one well below the global average. With the desire to lure big corporates (and hence jobs), the world average tax rate for corporates has been dropping steadily over the past 30 years. It was in 1987 when the US last dropped its top marginal corporate tax rate from 51% to 39%. And now 30 years later, they have dropped the top rate from 39% to 21%. Over this same time, the global average corporate tax rate has dropped from about 38% to almost 20%.
Along with France, Belgium and Japan, Australia now sits as one of the highest tax environments for corporates in the developed world. Proposed changes pulling the corporate tax rate down from 30% to 25% over the next decade are likely to bring Australian rates closer to peers, but that will only be the case should other countries stick with their current levels. With the biggest economy in the world making such a quick and monumental shift, it might not be long before other countries start to re-examine their approach to the taxing of corporates.