Relationship Between Capital Tax Rate and Tax Quota in Europe

Abstract

The relationship between tax rate and tax revenue is the research subject of many papers, such as publications by J. Wanniski (1978), J. M. Buchanan, S. B. Lee (1982), M. J. Boskin (1988), Y. Hsing (1996), C. A. Clausing (2007), A. M. Brill, K. A Hassett (2007), Kubatova, Řihova (2009), M. Trabandt, H. Uhlig (2011, 2012), G. F. de Cordoba, J. L. Torres (2012). The study by Clausing (2007) is focused on research of the simple regression equation which is applied to the data by 29 OECD countries for the period 1979– 2002. The relationship between tax income and rate is extended by other factors, which (according to economic assumptions), also influence tax revenues. Tax revenue is defined as a tax quota (nominal tax revenue from corporate taxes divided by nominal gross domestic product) where tax quota is estimated from panel data of tax rate, squares of tax rates, corporate sector size and corporate profitability. Tax rate which maximizes tax quota level is about 33 %. A further important conclusion of the study is that the smaller (and more open) economies have “optimal” rates lower than the large (and more closed) states. Brill and Hassett (2007) used a similar methodology. Specifically, they divided panel data of OECD countries for the period 1981–2005 into 55-year periods. Moreover, their model included a variable delay. Their main contribution to the Laffer curve theory is confirmation that the tax rate maximizing relative tax revenue (tax quota) is diminishing over time. Moreover, it was demonstrated that the Laffer curve becomes steeper. A study written by Kubatova and Řihova (2009) also deals with the Laffer curve. They estimated regression models which include panel data of ten members of OECD for the period 1980–2006. Their econometric analysis proved that there exist Int Adv Econ Res (2014) 20:233–234 DOI 10.1007/s11294-013-9446-8