Expert: Corporate tax cut will not address lack of innovation

Proposed corporate tax cut is designed to keep Denmark competitive with Sweden and attract foreign investment, but some argue it will not resolve more fundamental problems

A reduction of the corporate tax rate is likely to be among the initiatives agreed upon between the government and opposition when they complete their negotiations over the second stage of a growth and jobs bill later this week.

Reducing the corporate tax rate from 25 to 22 percent is hoped to challenge Sweden – which is also planning on reducing its corporate tax rate to 22 percent and has an economy that has coped better with the financial crisis.

The competition between the two Scandinavian neighbours is centred on their respective capitals, both of which have been vying to attract more international businesses and talent than the other. As of now, Stockholm seems to have the upper hand.

According to a recent report from the Stockholm Chamber of Commerce, the greater Stockholm region will house 500,000 more residents by 2030 – a rate of growth more than double that of Copenhagen's expected 100,000 more residents by 2020.

Copenhagen’s sluggish growth rate compared to Stockholm may frustrate the city’s business leaders given that Copenhagen was last September identified by the consultant firm PricewaterhouseCoopers as being the easiest Nordic capital for doing business.

And despite last year’s World Bank report which identified Denmark as the easiest country in Europe, and fifth easiest in the world, to do business in, Denmark has not yet managed to turn this to its advantage.

To help the struggling economy, the government has proposed two growth and jobs bills which will reduce taxes and levies on businesses and products. This is hoped to encourage job creation and stimulate domestic consumption by, for example, limiting the number of Danes who travel to Germany to purchase cheaper beer and soft drinks.

The finance minister, Bjarne Corydon (Socialdemokraterne), has argued that reduce the corporate tax rate is necessary if Denmark wants to remain able to attract foreign businesses.

“When other countries lower their corporate tax, it places us under attack because it’s those countries who are going to attract investments and jobs and not us,” Corydon told Jyllands-Posten newspaper. 

Corydon’s move is supported by members of the right-wing opposition, as well as the liberal think tank Cepos, which has argued in recent days that the government should bring down the corporate tax rate to 20 percent in order to match the UK and Finland’s planned rates.

But think tank Cevea argues that there is little evidence to suggest that Denmark will benefit from cutting the corporate tax rate, and says public investment is a far more reliable way to create jobs.

“It’s a myth that lowering corporation tax will create more growth and jobs,” Cevea managing's director, Kristian Weise wrote, in a press release. “That might be the case in the economists' models and graphs, but history tells a different story. Corporate tax rates have often been cut but have not led to more investments or higher growth.”

Taxes not the real problem

Weise is not alone in his criticism of the government’s strategy for addressing the country’s faltering economic position.

According to Erik Rasmussen, the founder of the think-tank Mandag Morgen (MM), reducing taxes does not address the central problems facing the Danish economy.

“The bill is unlikely to produce the promised growth, let alone many jobs,” Rasmussen wrote in a recent article published by MM. “Denmark is suffering more from an innovation crisis than an economic crisis and therefore needs a broader spectrum treatment than what the Finance Ministry can administer.”

According to Rasmussen, the real problem is that Denmark is uncompetitive. This reduces the pressure on businesses to produce new products – a problem which is not addressed by making beer and soda cheaper.

The government’s productivity commission recently identified a lack of competition – particularly in the small Danish domestic market – as a primary cause of Denmark’s poor rate of economic growth.

While the commission advised reducing government regulation and improving education levels, industry lobby group Dansk Industri (DI) argued that reducing the tax burden would help businesses – and make Denmark an attractive place to invest – by improving profit margins.

“The competition between countries for investment is intense and criticism of the government’s proposal to reduce corporation tax is built on a misapprehension,” DI's managing director, Karsten Dybvad, wrote in a press release. “Corporate tax and the ability to attract investment are at the core of our ability to compete and create jobs.”

MM's Rasmussen disagrees that a lower tax will make much difference, however. He argues that despite repeated attempts to stimulate the Danish economy over the past 20 years, little had changed.

“Stagnating productivity, dropping welfare, weakening competition, an educational level below our neighbours, few growing businesses, limited innovation in businesses and limited competition in the Danish market show that the reforms that have dominated the political agenda over the years have not made a difference,” Rasmussen wrote.

“In order to ensure Denmark has a long-term growth, it is necessary to create a far deeper understanding of the nation’s particular problems and challenges and the reasons we ended up in this situation.”

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