Research on Paying Taxes

Doing Business considers the following list of papers as relevant for research on paying taxes. Some papers—denoted with an asterisk (*)—use Doing Business data for their empirical analysis. If we've missed any important research, please let us know.

Author(s): Raymond Fisman and Jakob Svensson

Journal: Journal of Development Economics, Volume 83, Issue 1, May 2007, Pages 63-75

Abstract: Exploiting a unique data set containing information on the estimated bribe payments of Ugandan firms, we study the relationship between bribery payments, taxes and firm growth. Using industry-location averages to circumvent potential problems of endogeneity and measurement errors, we find that both the rate of taxation and bribery are negatively correlated with firm growth. A one-percentage point increase in the bribery rate is associated with a reduction in firm growth of three percentage points, an effect that is about three times greater than that of taxation. This provides some validation for firm-level theories of corruption which posit that corruption retards the development process to an even greater extent than taxation.

Author(s): Mihir A. Desai and Dhammika Dharmapala

Journal: The Review of Economics and Statistics, August 2009, Vol. 91, No. 3, Pages 537-546

Abstract: Do corporate tax avoidance activities advance shareholder interests? This paper tests alternative theories of corporate tax avoidance using unexplained differences between income reported to capital markets and to tax authorities. OLS estimates indicate that the effect of tax avoidance on firm value is a function of firm governance, as predicted by an agency perspective on corporate tax avoidance. Instrumental variables estimates based on exogenous changes in tax regulations yield larger overall effects and reinforce the basic result, as do several robustness checks. The results suggest that the simple view of corporate tax avoidance as a transfer of resources from the state to shareholders is incomplete given the agency problems characterizing shareholder-manager relations.

Author(s): Becker, Johannes; Fuest, Clemens; Riedel, Nadine

Journal: European Economic Review, Volume 56, Issue 8, Pages 1495-1511 , November 2012

Abstract: This paper measures the relative importance of quality and quantity effects of corporate taxation on foreign direct investment. Quantity is affected if corporate taxes reduce the equilibrium stock of foreign capital in a given country. Quality effects arise if taxes decrease the extent to which investment contributes to the corporate tax base and the capital intensity of production. Depending on the sign of the quality effects, the detrimental welfare effects of corporate taxation are either mitigated or aggravated. We derive a number of hypotheses about how corporate tax changes may affect the quality of investment. Our hypotheses are then tested using data from a large sample of European multinationals. With regard to corporate tax effects on the corporate tax base, we find that quality effects account for up to 40% of the total effect. With regard to corporate tax effects on labour income, our results suggest that quality effects mitigate the negative quantity effect by nearly 60% (as corporate taxes strongly increase the labour intensity of production). An important implication is that governments should not exclusively care about the size of inbound FDI flows but also about their specific characteristics, i.e. their quality.

Author(s): Lawless, Martina

Journal: Economica, Volume 80, Issue 317, Pages 1-22, January 2013

Abstract: The negative relationship between tax rates and FDI is well known. This paper looks at how complexity of the tax system affects FDI. Fulfilling tax requirements can be time-consuming, and this implies a cost for more complex tax systems. Alternatively, complexity may provide opportunities to reduce the overall tax bill. We find that measures of tax complexity have a significant inhibiting effect on the presence of FDI for a country pair, but have little impact on the level of FDI flows. A 10% reduction in tax complexity is comparable to a one percentage point reduction in effective corporate tax rates.

Author(s): Chang Woon Nam and Doina Maria Radulescu

Journal: Small Business Economics, Springer, Volume 29, Numbers 1-2 / June, 2007

Abstract: Corporate tax reforms carried out in EU countries since 1980 entail lower statutory tax rates and reductions in generous tax depreciation provisions. Several countries including the UK have reduced tax rates for small and medium sized enterprises (SMEs). This study compares incentive effects of such reforms on the SMEs? investment decisions adopting a simple present value model. Ceteris paribus, tax rates and depreciation rules vary in the model simulation, while the application of historical cost accounting method in inflationary phases leads to fictitious increases in nominal net present value. Apart from the construction of international ranking, country-specific patterns of reform effects are also illustrated.

Author(s):  Andreas Hauflera, Pehr-Johan Norbäckc, Lars Perssonb

Journal: Journal of Public Economics

Abstract: Stimulating entrepreneurship is high on the policy agenda of many countries. We study the effects of tax policies on entrepreneurs' choice of riskiness (or quality) of an innovation project, and on their mode of commercializing the innovation (market entry versus sale). Limited loss offset provisions in the tax system induce entrepreneurs innovating for entry to choose projects with inefficiently little risk. The same distortion does not arise when entrepreneurs sell their innovation in a competitive bidding process to an incumbent before the uncertainty is revealed. Tax systems which systematically favor market entry of entrepreneurs can thus lead to welfare losses due to inefficient quality choices, despite leading to more competition in the product market.

Author(s): Croce, M. Max; Kung, Howard; Nguyen, Thien T.; et al.

Journal: Review of Financial Studies, Volume 25, Issue 9, Pages 2635-2672, September 2012

Abstract: The surge in public debt triggered by the financial crisis has raised uncertainty about future tax pressure and economic activity. We examine the asset pricing effects of fiscal policies in a production-based general equilibrium model in which taxation affects corporate decisions by: (1) distorting profits and investment; (2) reducing the cost of debt through a tax shield; and (3) depressing productivity growth. In settings with recursive preferences, these three tax-based channels generate sizable risk premia, making tax uncertainty a first-order concern. We document further that corporate tax smoothing can substantially alter the effects of public expenditure shocks.

Author(s): Besley, Timothy

Journal: The Journal of Economic Perspectives

Abstract: The importance of a well-functioning legal and regulatory system in creating an effective market economy is now widely accepted. One flagship project that tries to measure the environment in which businesses operate in countries across the world is the World Bank's Doing Business project, which was launched in 2002. This project gathers quantitative data to compare regulations faced by small and medium-size enterprises across economies and over time. The centerpiece of the project is the annual Doing Business report. It was first published in 2003 with five sets of indicators for 133 economies, and currently includes 11 sets of indicators for 189 economies. The report includes a table that ranks each country in the world according to its scores across the indicators. The Doing Business project has become a major resource for academics, journalists, and policymakers. The project also enjoys a high public profile with close to ten million hits on its website each year. With such interest, it's no surprise that the Doing Business report has come under intense scrutiny. In 2012, following discussions by its board, the World Bank commissioned an independent review panel to evaluate the project, on which I served as a member. In this paper, I first describe how the Doing Business project works and illustrate with some of the key findings of the 2015 report. Next, I address what is valuable about the project, the criticisms of it, and some wider political economy issues illustrated by the report.

Author(s): Ralph Bayer and Frank Cowell

Journal: Journal of Public Economics, Volume 93, Issues 11-12, December 2009, Pages 1131-1143

Abstract: We focus on a relatively neglected area of the tax-compliance literature in economics, the behaviour of firms. We examine the impact of alternative audit rules on receipts from a tax on profits in the context of strategic interdependence of firms. The enforcement policy can have an effect on firms' behaviour in two dimensions ? their market decisions as well as their compliance behaviour. An appropriate design of the enforcement policy can thus have a ?double dividend? by manipulating firms in both dimensions.

Author(s): Young Lee and Roger H. Gordon

Journal: Journal of Public Economics, Volume 89, Issues 5-6, June 2005, Pages 1027-1043

Abstract: Past theoretical work predicts that higher corporate tax rates should decrease economic growth rates, while the effects of high personal tax rates are less clear. In this paper, we explore how tax policies in fact affect a country's growth rate, using cross-country data during 1970?1997. We find that statutory corporate tax rates are significantly negatively correlated with cross-sectional differences in average economic growth rates, controlling for various other determinants of economic growth, and other standard tax variables. In fixed-effect regressions, we again find that increases in corporate tax rates lead to lower future growth rates within countries. The coefficient estimates suggest that a cut in the corporate tax rate by 10 percentage points will raise the annual growth rate by one to two percentage points.

Author(s): Mina Baliamoune-Lutz, Pierre Garello

Journal: Small Business Economics

Abstract: Using macro-level panel data, we examine the effects of taxation and tax progressivity on entrepreneurship in a large group of European countries. We address two main questions. First, we try to explore whether tax increases discourage entrepreneurial activity, focusing on new self-employment (nascent entrepreneurship). Second, we investigate the impact of tax progressivity on entrepreneurship, again focusing on new self-employment. We find that tax progressivity at higher-than-average incomes has a robust negative effect on nascent entrepreneurship. We discuss the policy implications of our results.

Author(s): Roger Gordon and Wei Li

Journal: Journal of Public Economics, Volume 93, Issues 7-8, August 2009, Pages 855-866

Abstract: Tax policies seen in developing countries are puzzling on many dimensions, given the sharp contrast between these policies and both those seen in developed countries and those forecast in the optimal tax literature. In this paper, we explore how forecasted policies change if firms can successfully evade taxes by conducting all business in cash, thereby avoiding any use of the financial sector. The forecasted policies are now much closer to those observed.

Author(s): Wolfgang Breuer, M. Oliver Rieger, K. Can Soypak

Journal: Journal of Banking and Finance

Abstract: We study a model that relates dividend payout policy to behavioral issues based on the ideas of mentalaccounting. A panel analysis across 29 countries and over 43,000 firm-years demonstrates that our modelstudying the relation between dividends and patience, loss aversion, and ambiguity aversion can be verifiedempirically. Our paper seems to be the first that highlights empirically in a straightforward way therelevance of behavioral patterns as important determinants for corporate dividend policy, while previousempirical studies could tackle this issue only indirectly. With several robustness tests we also addresspotential doubts concerning the quality of our data and analyze further implications of our theory.

Author(s): Andr Stel & David Storey & A. Thurik

Journal: Small Business Economics, Springer, vol. 28(2), pages 171-186, March.

Abstract: We examine the relationship, across 39 countries, between regulation and entrepreneurship using a new two-equation model. We find the minimum capital requirement required to start a business lowers entrepreneurship rates across countries, as do labour market regulations. However the administrative considerations of starting a business ? such as the time, the cost, or the number of procedures required ? are unrelated to the formation rate of either nascent or young businesses. Given the explicit link made by Djankov et al. (2002) between the speed and ease with which businesses may be established in a country and its economic performance ? and the enthusiasm with which this link has been grasped by European Union policy makers ? our findings imply this link needs reconsidering.

Author(s): Simeon Djankov, Tim Ganser, Caralee McLiesh, Rita Ramalho, and Andrei Shleifer

Journal: American Economic Journal, Volume 2, Issue 3, Pages 31-64, July 2010

Abstract: We present new data on effective corporate income tax rates in 85 countries in 2004. The data come from a survey, conducted jointly with PricewaterhouseCoopers, of all taxes imposed on ?the same? standardized mid-size domestic firm. In a cross-section of countries, our estimates of the effective corporate tax rate have a large adverse impact on aggregate investment, FDI, and entrepreneurial activity. Corporate tax rates are correlated with investment in manufacturing but not services, as well as with the size of the informal economy.The results are robust to the inclusion of many controls.

Author(s): Alessandro Gavazza, Alessandro Lizzeri

Journal: Review of Economic Studies, Volume 76, Issue 3, pages 1023?1048, July 2009

Abstract: We provide a two period model of political competition in which voters imperfectly observe the electoral promises made to other voters. Imperfect observability generates an incentive for candidates to offer excessive transfers even if voters are homogeneous and taxation is distortionary. Government spending is larger than in a world of perfect observability. Transfers are partly financed through government debt, and the size of the debt is higher in less transparent political systems. The model provides an explanation of fiscal churning; it also predicts that groups whose transfers are less visible to others receive higher transfers, and that imperfect transparency of transfers may lead to underprovision of public goods. From the policy perspective, the main novelty of our analysis is a separate evaluation of the transparency of spending and the transparency of revenues. We show that the transparency of the political system does not unambiguously improve efficiency: transparency of spending is beneficial, but transparency of revenues can be counterproductive because it endogenously leads to increased wasteful spending.

Author(s): Dhammika Dharmapala and James R. Hines Jr.

Journal: Journal of Public Economics, Volume 93, Issues 9-10, October 2009, Pages 1058-1068

Abstract: This paper analyzes the factors influencing whether countries become tax havens. Roughly 15% of countries are tax havens; as has been widely observed, these countries tend to be small and affluent. This paper documents another robust empirical regularity: better-governed countries are much more likely than others to become tax havens. Controlling for other relevant factors, governance quality has a statistically significant and quantitatively large association with the probability of being a tax haven. For a typical country with a population under one million, the likelihood of a becoming a tax haven rises from 26% to 61% as governance quality improves from the level of Brazil to that of Portugal. Evidence from US firms suggests that low tax rates offer much more powerful inducements to foreign investment in well-governed countries than do low tax rates elsewhere. This may explain why poorly-governed countries do not generally attempt to become tax havens, and suggests that the range of sensible tax policy options is constrained by the quality of governance.

Author(s): Thorsten Beck, Chen Lin, Yue Ma

Journal: The Journal of Finance

Abstract: Tax evasion is a widespread phenomenon across the globe and even an important factor in the ongoing sovereign debt crisis. We show that firms in countries with better credit information?sharing systems and higher branch penetration evade taxes to a lesser degree. This effect is stronger for smaller firms, firms in smaller cities and towns, firms in industries relying more on external financing, and firms in industries and countries with greater growth potential. This effect is robust to instrumental variable analysis, controlling for firm fixed effects in a smaller panel data set of countries, and many other robustness tests.

Author(s): Belitski, Maksim;  Chowdhury, Farzana; Desai, Sameeksha 

Journal: Small Business Economics

Abstract:Tax policies and corruption are important institutional considerations which can shape entrepreneurship. We investigate how tax rates, and the interaction between corruption and tax rates, influence variations in entry across a panel of 72 countries in the period 2005–2011. We use a series of panel estimations as well as several robustness checks to test these effects, using relevant controls for economic development, the size of the state, and other regulatory and tax policy measures. We find that higher tax rates consistently discourage entry. Further, we find that although the direct influence of corruption on entry is also consistently negative, the interaction influence of corruption and tax rate is positive. This indicates that corruption can offset the negative influence of high taxes on entry. We discuss the implications of our findings for policymakers and future research.

Author(s): Jerbashian, Vahagn; Kochanova, Anna

Journal: World Bank Economic Review 

Abstract: This paper—prepared as a background paper to the World Bank’s World Development Report 2016: Digital Dividends—is a product of the 2016 World Development Report Team, Development Economics Vice Presidency. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world

Author(s): Kochanova, Anna; Hasnain, Zahid; Larson, Bradley

Journal: Empirical Economics

Abstract: Using industry-level data from 14 OECD countries and doing business indicators of the World Bank, we analyze how country-level regulations of business activities affect investments in information and communication technologies (ICT). We find that investments in ICT decrease with the costs of starting and operating a business and registering property. Investments increase with the strength of legal rights. We also find that investments in software increase with the ability of shareholders to sue managers for misconduct, and investments in communication technologies decline with the extent of director liability for self-dealing.

Author(s): Hausman, David; Zikhali, Precious 

Journal: World Bank Economic Review 

Abstract: Asserts that behind South Africa’s growth in tax revenue there exist a series of institutional reforms that helped persuade more people to pay their taxes. At the end of apartheid, one of South Africa’s most pressing challenges was improving the efficiency, efficacy, and adequacy of the tax system and generating income for the reforms in the social and economic sectors. Challenges included a low level of tax compliance (only about 6 percent of South Africans paid income tax); weak, nontransparent, and noninclusive taxpayer services; lack of racial diversity among staff; and a shortage of qualified middle managers. These challenges were addressed by (1) establishing a unified South African Revenue Service (SARS); (2) creating a service culture, through professionalization of staff, process reengineering, and taxpayer service innovations; and (3) transforming the organization so that it could broaden the tax base, raise tax revenues, and reduce tax evasion.

Author(s): Block, Jörn 

Journal: IZA Journal of Labor Economics 

Abstract: Corporate income taxation influences the quantity and type of entrepreneurship, which in turn affects economic development. Empirical evidence shows that higher corporate income tax rates reduce business density and entrepreneurship entry rates and increase the capital size of new firms. The progressivity of tax rates increases entrepreneurship entry rates, whereas highly complex tax codes reduce them. Policymakers should understand the effects and underlying mechanisms that determine how corporate income taxation influences entrepreneurship in order to provide a favorable business environment.

Author(s): Hallerberg, Mark; Scartascini, Carlos

Journal: European Journal of Political Economy 

Abstract: This paper examines whether elections, which are generally held on fixed dates, and banking crises explain the timing of tax reforms and the allocation of the additional tax burden. Using an original fine-grained data set of tax reforms, the paper finds support for the role of these two sources of variation. In particular, the probability of reform is higher during banking crises. During electoral periods, increasing taxes becomes highly unlikely, even if the government is facing financing problems. Interestingly, politics seem to trump economics: banking crises do not affect the probability of having a reform during electoral times. Moreover, the presence of an IMF program affects the tax instruments chosen: countries with a program increase the value-added tax, while those without raise the personal income tax. Finally, the ideology of the president does not explain who bears the additional tax burden.