Are Corporate Tax Rates, or Countries, Converging?
Author(s):
Joel Slemrod
Journal:
Journal of Public Economics 88 (6): 1169–86, 2004
Abstract:
The statutory rate and effective tax rate imposed on corporation income—as well as the dispersion of these rates—began to decline in the 1980s. Is this due to changes in the domestic determinants of corporate taxation or increases in international pressures for tax competition? This paper finds clear evidence that the corporate tax rate is insulated from a country’s revenue needs: across countries, there is no association of the expenditure–GDP ratio with the corporate statutory rate and only weak evidence of a positive association with the average rate. There is suggestive, but not definitive, evidence that the domestic role of the corporate tax as a backstop to the individual income tax is important: across countries, there is indeed a strong association between the top individual rate and the top statutory corporate rate. There is intriguing evidence about the role of international competitive pressures on corporate taxation. Measures of openness are negatively associated with statutory corporate rates, although not with revenues collected as a fraction of GDP. Strikingly, larger, more trade-intensive countries do collect more corporate tax, but this may be because these countries are more attractive venues for investment.
Are Corruption and Taxation Really Harmful to Growth? Firm Level Evidence
Author(s):
Raymond Fisman and Jakob Svensson
Journal:
Journal of Development Economics 83(1): 63-75, 2007
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.
Corporate Tax Avoidance and Firm Value
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.
Effects of Corporate Tax Reforms on SMEs’ Investment Decisions under the Particular Consideration of Inflation
Author(s):
Chang Woon Nam and Doina Maria Radulescu
Journal:
Small Business Economics, Springer 29(1-2):101-108, 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.
Foreign Direct Investment in a World of Multiple Taxes
Author(s):
Mihir Desai, C. Fritz Foley and James R. Hines Jr
Journal:
Journal of Public Economics 88: 2727–44, 2004
Abstract:
Governments impose multiple taxes on foreign investors, though studies of the effect of tax policy on the location of foreign direct investment (FDI) focus almost exclusively on corporate income taxes. This paper examines the impact of indirect (non-income) taxes on FDI by American multinational firms, using affiliate-level data that permit the introduction of controls for parent companies and affiliate industries. Indirect tax burdens significantly exceed the foreign income tax obligations of foreign affiliates of American companies. Estimates imply that 10% higher local indirect tax rates are associated with 7.1% lower affiliate assets, which is similar to the effect of 10% higher income tax rates. Affiliate output falls by 2.9% as indirect taxes rise by 10%, while higher income taxes have more modest output effects. High corporate income tax rates depress capital/labor ratios and profit rates of foreign affiliates, whereas high indirect tax rates do not. These patterns reveal the impact of indirect taxes and suggest the mechanisms by which direct and indirect taxes affect FDI.
Tax compliance and firms' strategic interdependence
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.
Tax Rates and Tax Evasion: Evidence from Missing Imports' in China
Author(s):
Raymond Fisman, and Shang-Jin Wei
Journal:
Journal of Political Economy 112 (2): 471–96, 2004
Abstract:
"Tax evasion, by its very nature, is difficult to observe. We quantify the effects of tax rates on tax evasion by examining the relationship in China between the tariff schedule and the “evasion gap,” which we define as the difference between Hong Kong’s reported exports to China at the product level and China’s reported imports from Hong Kong. Our results imply that a one-percentage-point increase in the tax rate is associated with a 3 percent increase in evasion. Furthermore, the evasion gap is negatively correlated with tax rates on closely related products, suggesting that evasion takes place partly through misclassification of imports from higher-taxed categories to lower-taxed ones, in addition to underreporting the value of imports.
Tax Structure and Economic Growth
Author(s):
Young Lee and Roger H. Gordon
Journal:
Journal of Public Economics 89(5-6): 1027-1043, 2005
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.
Tax structures in developing countries: Many puzzles and a possible explanation
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.
The Effect of Corporate Taxes on Investment and Entrepreneurship
Author(s):
Simeon Djankov, Tim Ganser, Caralee McLiesh, Rita Ramalho, and Andrei Shleifer
Journal:
American Economic Journal, Volume: 2, Issue: 3, Pages: 31-64 - Published: JUL 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.
Transparency and Economic Policy
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.
Which countries become tax havens?
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.
Why is Fiscal Policy Often Procyclical?
Author(s):
Alberto Alesina, Filipe R. Campante, Guido Tabellini
Journal:
Journal of the European Economic Association Volume 6, Issue 5, pages 1006–1036, September 2008
Abstract:
Fiscal policy is procyclical in many developing countries. We explain this policy failure with a political agency problem. Procyclicality is driven by voters who seek to “starve the Leviathan” to reduce political rents. Voters observe the state of the economy but not the rents appropriated by corrupt governments. When they observe a boom, voters optimally demand more public goods or lower taxes, and this induces a procyclical bias in fiscal policy. The empirical evidence is consistent with this explanation: Procyclicality of fiscal policy is more pronounced in more corrupt democracies.