FRANKFURT, Germany – Economists at the European Central Bank say that the U.S. corporate tax cut should lift the world’s largest economy in the short term but warn it could erode the tax base in European countries by intensifying global competition for lower rates.
Continue Reading Below
Their short article, released Monday and set to appear Thursday in the ECB’s regular economic bulletin, says that the cut in business taxes will provide a “significant fiscal stimulus” to growth in the U.S. and would be “positive in the short term.”
It warned that long-term effects were less clear, especially if the cut leads to larger U.S. budget deficits. And it said that such fiscal stimulus tends to have less effect during periods of growth than during recessions. Additionally, they said that much economic research indicates that government spending tends to provide more stimulus per dollar than an equivalent amount in tax cuts.
Effects on the 19-country eurozone were “highly uncertain and complex” but could include tax base erosion if countries around the world compete by lowering their tax rates to attract businesses.
“Lower U.S. corporate tax rates raise the tax attractiveness of the United States relative to other countries,” the report said. “Prior to the reform, the U.S. corporate tax rate stood above the rates of all large euro area countries, while, after the reform, it is close to the lower end of rates in those countries.”
The legislation, which was pushed by President Donald Trump and signed into law in December, lowers the corporate tax rate from 35 to 21 percent, among other changes. The changes took effect Jan. 1.
