Abstract
PurposeThe present study aims to investigate the impact of the reduction of the corporate tax rate on corporate tax revenue. The study adopts the theory of taxation by Ibn Khaldun, depicted as the Laffer curve.Design/methodology/approachThe paper analyses time series data for the period 1996 to 2014 using the autoregressive distributed lag (ARDL) approach.FindingsThe paper finds that the corporate tax rate has a dual effect on corporate tax revenue over the study period. It shows an inverted U-shape relationship between the corporate tax rate and corporate tax revenue and reveals that the optimal tax rate is 25.5156 per cent. Inferentially, a positive relationship exists between the two variables prior to the optimal tax rate, and a negative relationship prevails afterwards. A further test of causality shows a long-run unidirectional causality between corporate tax rate and corporate tax revenue.Research limitations/implicationsFirst, it should be noted that the policy was not implemented in isolation. Several other tax incentives were given to corporate tax payers, and therefore, such incentives should be controlled for to have a more insightful evaluation of the policy. Second and most important, there is a need to investigate whether the increased cash flow available to firms as a result of the reduction in the corporate tax rate adds value to firms. It is also necessary to investigate whether firms’ stakeholders benefited from the increased cash flow or was there managerial diversion of firms’ resources.Practical implicationsThe policy of gradual reduction of the corporate tax rate in Malaysia is suspected to have a positive impact on the productivity of Malaysian companies, which has contributed to an increase in corporate tax revenue. It also has a positive impact on the economic growth of the country. It means that the lower corporate tax rate has actually reduced the cost of doing business in the country.Originality/valueThe benefit of increased corporate tax revenue needs to be investigated empirically for insightful policy evaluation. In Malaysia, however, such investigation is close to non-existent to the best knowledge of the researchers. Thus, the present study aims at investigating the impact of the policy of gradual reduction of the corporate tax rate on corporate tax revenue over an 18-year period from 1996 to 2014.
Highlights
The Malaysian Government’s budget for 2014 stated that the corporate income tax rate in Malaysia would be reduced to per cent in 2016 from the rate of per cent that had prevailed since 2009
Research limitations/implications – First, it should be noted that the policy was not implemented in isolation
The fifth was for anchor companies under the vendor development programme, which was initiated by the government to stimulate economic growth through the small and medium enterprises (SMEs) sector in co-operation with large firms
Summary
The Malaysian Government’s budget for 2014 stated that the corporate income tax rate in Malaysia would be reduced to per cent in 2016 from the rate of per cent that had prevailed since 2009. A similar argument is found in Ismail and Jaafar (2013) wherein the authors documented evidence for the relevance of Ibn Khaldun’s theory of taxation in today’s economies by examining the relationship between tax increases and economic growth in 30 different countries (cutting across developed, developing and less developed economies). Ibn Khaldun’s theory of taxation, depicted as the Laffer curve, will be used in the present study in understanding the impact of a gradual reduction in the corporate tax rate in Malaysia. This is in line with other studies that have used the theory in understanding tax issues in the country. Due to the short sample size, we provide for intercept only in the estimation process
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