International
Taxes and Competitiveness – Is there any link? - World Competitiveness Yearbook 2005
By Finfacts Team
May 12, 2005, 13:00

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Stéphane Garelli is a Professor at both the International Institute for Management Development (IMD), one of the world's leading business schools, and at the University of Lausanne. He is an authority on World Competitiveness and his research focusses particularly on how nations and enterprises compete on International markets. He is also Director of the World Competitiveness Yearbook- the most comprehensive and reputed study in the field of the competitiveness of nations - which is published by IMD. This yearly report compares the competitiveness of forty-six nations using 250 criteria.

“Many business and political leaders intuitively feel that lower taxes sustain competitiveness by boosting investment and personal spending. It may be true. However, the findings of the World Competitiveness Yearbook 2005 indicate a subtler link," according to Professor Stéphane Garelli of International Institute for Management Development (IMD), one of the world's leading business schools, and at the University of Lausanne.  

 

The competitiveness of Luxembourg, Denmark, Finland, Norway, Sweden, and Belgium was good in 2004 – the highest economic growth rates in continental Europe – despite a significant overall tax pressure (above 40% of GDP). At the same time, the US, Australia, Estonia, Ireland and the Slovak Republic had remarkable growth rates while relying on much lower taxes (between 25% and 34% of GDP). Finally, Japan and Switzerland have both shown very weak economic growth over the past ten years in spite of low total tax pressure (27% and 30% respectively)! Clearly any link between taxation levels and competitiveness performance is far from evident at first glance.

 

The first observation is that competitiveness reacts differently to the various types of taxes that are levied. A direct impact is more easily established between corporate taxation and competitiveness than with personal, social or indirect taxes. As a consequence, Northern European nations heavily tax personal income and consumption but spare corporate profits.

 

The second observation is that taxes are perceived in general as fuelling excessive government spending. Here again, a direct correlation with competitiveness is hard to establish. Sweden, the Netherlands, Denmark, Finland or the UK display high levels of government spending, in excess of 20% of the GDP, and high competitiveness performance. At the other end of the spectrum, only 11% of the GDP of Singapore and Hong Kong goes towards government spending and they also have a top competitiveness performance. It would appear that the efficiency and quality of government expenditure matter more than the size.

 

So what? Tax policy is no substitute for competitiveness. The level and type of taxation can enhance or hinder competitiveness, but cannot create it. The real “engines” of competitiveness are science, technology, entrepreneurship, finance, logistics and education. Tax still matters in as much as it is part of the overall cost of doing business- one of the major reasons why companies relocate abroad. Thus, the real impact of taxes is on job creation or destruction. A higher cost of business can be somewhat offset by improving the ease of doing business. Thus, it would appear that as far as competitiveness is concerned, the simplicity of the tax system is just as important as the level of taxation per se. In this regard, a simpler flat tax system may be more valuable in the long run than a complex low tax regime.”

 

THE 2005 WORLD COMPETITIVENESS RANKINGS

 

 

(NB: The Scores are actually indices (0 to 100) generated for the unique purpose of constructing charts and graphics.) 

 

HIGHLIGHTS FROM THE WORLD COMPETITIVENESS LANDSCAPE IN 2005

 

1.       The uneven growth rates between Asia, the US, Latin America and Europe, (but also inside regions such as between Eastern and Western Europe) continue to create economic and political tensions.

2.       Persistent deficits in the US maintain a weak dollar and exacerbate the instability of currencies now divided into three main monetary zones: Dollar, Euro and Yen.

3.       Asia’s strong appetite for raw materials and the US need for capital increase the prices for commodities and money.

4.       A rise in interest rates, especially in the US, can in turn jeopardize economic growth and hamper the borrowing capacity of many emerging nations.

5.       As a consequence, inflation that had completely disappeared because of the intensity of global competition resurfaces as a source of concern.

6.       A growing gap is also developing between the performance of the global economy, which is good, and the domestic sector, which is less buoyant, especially in Europe.

7.       A similar disparity occurs between Anglo-Saxon economies, which thrive on consumption, and sometimes debt, and other nations mainly in Continental Europe and Asia, which prefer to thrive on investment and saving.

8.       A significant disparity in labor costs among industrialized and emerging nations continues to be the main factor for the relocation of activities worldwide.

 

Developments can be found in the Executive Summary of the WCY 2005 

 

For more information, click here. 

 

 

 

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