Statutory Corporate Tax Rates Research Articles

Statutory Corporate Tax Rates and Income Distribution — Panel Data From 95 Countries Using Driscoll and Kraay Standard Errors and Quantile via Moments

The study uses the statutory corporate tax rate to explain before and after tax and transfer income distribution. The unbalanced panel has 95 countries from 1988 to 2018. The study uses Driscoll & Kraay standard errors and Quantile Via Moments. The study finds higher corporate tax rates appear to lessen income inequality in most cases, small coefficients suggest it is minor and insignificant for after-tax and transfer income distribution in developed countries. Furthermore, in an augmented model with fewer observations spanning 1988 to 2005, the average rate of personal income tax progressivity significantly reduces net income inequality while the statutory corporate tax rate is insignificant. Therefore, findings may indicate increases in personal income tax rate progressivity may be more effective policy tools than changes in statutory corporate tax rates to moderate growing income inequality.

EXAMINING TAX RATES, TERRORISM, AND TRADE OPENNESS AS DETERMINANTS OF FOREIGN DIRECT INVESTMENT IN PAKISTAN: AN EMPIRICAL ASSESSMENT

Foreign direct investment is crucial for economic development, particularly in emerging economies. Recently, developing countries has seen a rise in the rate of foreign direct investment (FDI) inflows on an annual basis. Tax holidays, investment allowances, exemptions, deductions, and other tax breaks are some of the incentives that a number of countries are providing in an effort to attract more foreign direct investment (FDI). The purpose of this study is to investigate how decisions about foreign direct investment (FDI) are affected by Pakistan's tax system. Specifically, researchers analyzed the impact of the statutory corporation tax rate, the real effective exchange rate, terrorism, and trade openness on foreign direct investment, with GDP growth serving as the controlled variable. Data from time series covering the years 1986 to 2021 are used. The data was compiled using the World Development Indicator (WDI) and the Economic Survey of Pakistan. Researchers used the empirical methods of Auto-Regressive Distributed Lag (ARDL) and Error Correction Model (ECM). The findings indicated that low taxes encouraged long-term FDI relationships between Pakistan and international investors. The statutory corporate tax rate, the real effective exchange rate, and the threat of terrorism are all independent variables that have a negative and significant influence on foreign direct investment. In addition, the findings showed that a significant and favorable influence on foreign direct investment (FDI) was achieved by an increase in both trade openness and GDP growth. It is suggested that developing countries decision-makers implement measures that reduce taxes in order to attract foreign direct investment. In this context, the government must review its foreign direct investment formulation goals.

Stock Market Response to Changes in the Statutory Corporate Income Tax Rate: Comparative Analysis between Developed and Developing Economies

In this study, the authors use an empirical approach to evaluate the impact of changes in the statutory corporate tax rate on stock market returns. The main objective is to investigate whether changes in income tax rates impact stock market returns and to examine the extent of this impact. According to the United Nations country classifications, the authors categorized the sample economies into two types: developed and developing1. The study further scrutinizes the differences in the outcomes when comparing developed with developing economies using a comparative study approach. Data on corporate tax rates and corresponding stock market returns are analyzed for developed economies of Japan, US and Italy, and developing economies of South Africa, Malaysia and India. The study uses panel data regression and correlation analysis of the variables of stock market returns and corporate tax rates from1990 to 2010. The statistical analysis revealed that the only significant impact was of tax cuts on stock market returns in general, and developed countries responded more strongly to tax cuts. For a 1% tax cut in rates, the stock markets could expect an increase in returns of 0.185% in the year of the tax change. Tax hikes, however, did not reveal any significant adverse effect on stock market returns. Hence, it is pertinent to note that developed and developing economies exhibit varied behaviors toward corporate tax policies and governments could make calculated decisions, considering the consequences of their tax policies on capital markets and corporate valuations.

United States Tax Rates and Economic Growth

American politicians aim to create economic activity that will expand the economy and provide opportunities for citizens. Today (in 2022), President Joseph Biden presents an ambitious tax plan to grow the economy and provide for more equal opportunities. With Biden’s aim for a tax increase, this research examines the impacts of tax and other economic variables on economic wellbeing. In turn, this research provides a timely update on contributing factors to economic growth. Previous academic research shows the impacts of tax rates and common economic variables related to U.S. economic growth. We gather data from 1960 to 2020 to explore U.S. real gross domestic product (GDP) per capita. Through a series of multiple regression models, we find that increases in the highest statutory corporate and personal income tax rates reduce real GDP per capita. Growth in net exports of goods and services, M2 money supply, multifactor productivity and cost, collectively increase real GDP per capita, while, the personal savings rate, and the market value of gross federal debt decrease real GDP per capita. We recommend that if Congress elects to raise tax rates, it should start with the personal income tax rate.

At A Cost: The Real Effects of Thin Capitalization Rules

Thin capitalization rules (TCRs) aim to mitigate profit shifting by multinational corporations (MNCs) but, by raising the cost of capital for affected affiliates, can also negatively affect real investment. Exploiting unique panel data on multinational companies in 34 countries during 2006-2014, we estimate that the size of this adverse investment effect can be large, and dependent on the statutory corporate tax rate and the tightness of the safe-haven ratio. Negative investment effects are more pronounced for highly-levered firms for which TCRs are more likely to be binding.

At A Cost

Thin capitalization rules (TCRs) aim to mitigate profit shifting by multinational corporations (MNCs) but, by raising the cost of capital for affected affiliates, can also negatively affect real investment. Exploiting unique panel data on multinational companies in 34 countries during 2006-2014, we estimate that the size of this adverse investment effect can be large, and dependent on the statutory corporate tax rate and the tightness of the safe-haven ratio. Negative investment effects are more pronounced for highly-levered firms for which TCRs are more likely to be binding.

At a cost: The real effects of thin capitalization rules

Thin capitalization rules (TCRs) aim to mitigate profit shifting by multinational corporations (MNCs) but, by raising the cost of capital for affected affiliates, can also negatively affect real investment. Exploiting unique panel data on multinational companies in 34 countries during 2006–2014, we estimate that the size of this adverse investment effect can be large, and dependent on the statutory corporate tax rate and the tightness of the safe-haven ratio. Negative investment effects are more pronounced for highly-levered firms for which TCRs are more likely to be binding.

At a Cost: The Real Effects of Thin Capitalization Rules

Thin capitalization rules (TCRs) aim to mitigate profit shifting by multinational corporations (MNCs) but, by raising the cost of capital for affected affiliates, can also negatively affect real investment. Exploiting unique panel data on multinational companies in 34 countries during 2006-2014, we estimate that the size of this adverse investment effect can be large, and dependent on the statutory corporate tax rate and the tightness of the safe-haven ratio. Negative investment effects are more pronounced for highly-levered firms for which TCRs are more likely to be binding.

Ending Corporate Tax Avoidance and Tax Competition: A Plan to Collect the Tax Deficit of Multinationals

Between 1985 and 2019, the global average statutory corporate tax rate has fallen from 49 percent to 23 percent, largely due to the rise of international tax competition. The biggest winners from globalization have received the largest tax cuts. In this paper we propose a solution to replace this race-to-the-bottom with a race-to-the-top. Multinational companies that have low effective tax rates in some foreign countries (what we call a “tax deficit”) would pay an extra tax in their home country. We explain how such a tax should be designed and how it could be collected. The ideal solution would be for all countries to jointly start collecting the tax deficit of their multinationals. We describe how defensive measures could be applied against countries refusing to take part in such an agreement, measures that could ultimately pave the way to global corporate tax coordination.

The Impact of Effective Corporate Tax Rates on Investment

There exists an intense debate about the effects of corporate tax cuts on the formation of private capital in the real sector. This paper studies the investment impact of the effective fiscal burden of firms during the period 1995-2014. To this end, in a first step national accounts data is used to calculate backward looking average Effective Corporate Tax Rates (ECTR) for 73 developed and developing countries. In a second step, a dynamic panel approach is employed to estimate the impact of the ECTR on private gross fixed capital formation and foreign direct investment inflows. The obtained results indicate that: (i) ECTR not only tend to be much lower than statutory corporate tax rates, but also have different dynamics over time; and (ii) there exists no clear statistically significant negative relationship between ECTR and private investment. Instead, private capital formation and FDI inflows are rather explained by economic growth, the persistence of investment spending, trade openness, and the quality of institutions. This finding is robust when alternative effective corporate tax rate measures or statutory corporate tax rates are considered

Club convergence in the corporate income tax: The case of European effective rates

The corporate income tax is permanently under debate in recent decades with respect to coordination and competition issues, including the race-to-the-bottom hypothesis, and the effects on investment and economic growth of such a distortionary tax. In this paper we study the evolution of the effective corporate tax rates in the European Union through a convergence analysis, identifying common trends by a club convergence approach. The results evidence three clubs, with the high-tax-rate-club formed by France, Malta, Spain and Portugal. In addition, and compared with the results for the statutory corporate tax rates, important differences arise, showing the significance of the fiscal benefits in this tax and the distance between both tax rates in many European countries. Our results are also analysed in the fiscal harmonization framework.

Macroeconomic effects of corporate tax policy

Abstract Prior studies on the relation between corporate taxes and future macroeconomic growth present contradictory evidence. We argue this mixed evidence is at least partly due to the use of statutory corporate tax rates which ignore the complexity of tax exemptions, tax deductions, tax enforcement and firms’ tax planning. We propose an alternative tax rate measure that aggregates cash effective tax rates of listed firms, which reflect not only statutory tax rates, but also other features of the tax code, enforcement, and firms' tax planning. We find a strong robust negative relation between country-level effective tax rates and future macroeconomic growth.

Changes in Tax Neutrality of Effective Tax Rates in the Czech Republic in 2010–2018

he presented paper builds on previous research in this area (Holečková, 2013) and aims to examine the tax neutrality in the Czech Republic (i.e., the extent to which the given tax leaves corporate decisions as to investments or sources of financing unchanged). A tax system that seeks to raise revenue without distortive effects is considered a neutral tax system. This aspect is of great importance as it defines one of the aims of modern tax systems and points towards one specific criterion by which they may be assessed. Our approach adopts effective tax rates on different types of capital assets and sources of financing and based on the calculation of the tax wedges it assesses the degree to which taxation affects the incentive to undertake investments in the Czech Republic. The precise methodology used to calculate effective tax rates on marginal investments is based on the approach developed by King and Fullerton (1984), whose methodology became the most widely accepted method adopted to calculate effective tax rates (tax wedges). The method appeals to both academics and practitioners to this day (e.g., Florio, 2007). The tax wedge will vary according to the type of asset: machinery, buildings, inventory (because of different capital allowance rates relative to the assumed true economic depreciation rates) and the type of financing sources: new equity, debt and retained earnings (since the tax treatment of debt, dividends and retained earnings differs). Effective tax rates take into account not only the statutory corporate tax rate, but also other aspects of the tax system which determine the amount of taxes paid and profitability of investment, including personal taxes. The paper finds out that, based on the calculations for 2018, businesses need to ensure the rate of return higher by 1.33 percentage points for the retained earnings (and by 1.80 percentage points for new equity, respectively) compared to the final post-tax rate of return which investors actually get. The adopted analysis suggests that Czech tax system tends to favour investments in machinery on the expense of buildings and, particularly, inventories. With this respect, our results correspond to outcomes of other, similar country-specific studies, such as, for example, de Almeida–Paes (2013). The tax system also lacks neutrality when considering alternative sources of finance, i.e., the debt finance tends to be favoured over equity and retained earnings.

How Do Reductions in Foreign Country Corporate Tax Rates Affect U.S. Domestic Manufacturing Firms?

We examine whether reductions in foreign country statutory corporate tax rates affect the competitive environment of U.S. domestic manufacturing firms and how U.S. firms respond. We develop a measure of U.S. domestic firms’ exposure to changes in foreign country corporate tax rates and find U.S. domestic firms’ profitability is adversely affected by decreases in foreign country corporate tax rates, consistent with intensified competition. We find U.S. domestic firms respond by increasing investment in research and development and capital expenditures and by improving total factor productivity. In cross-sectional analyses, we find the impact of foreign tax cuts is concentrated among U.S. domestic firms with low product differentiation. Taken together, these findings suggest that reductions in foreign country statutory corporate tax rates escalate competition faced by U.S. domestic firms, and in response U.S. domestic firms increase investment and become more productive.

Corporate Taxation and Productivity Catch‐Up: Evidence from European Firms

AbstractIn this paper, we explore whether higher corporate tax rates, because they lower the after‐tax returns to productivity‐enhancing investments, reduce the speed with which small firms converge to the productivity frontier. Using data for 11 European countries, we find evidence that their productivity catch‐up is slower when the statutory corporate tax rates are higher. In contrast, we find that large firms are instead affected by effective marginal rates. Using the reduced‐form model of productivity convergence of Griffith et al. (2009, Journal of Regional Science 49, 689–720), our results are robust to a host of robustness checks and a natural experiment that exploits the 2001 German tax reforms.

Latest Tax Cuts: History Belies Promise of Growth

One provision of The Tax Cuts and Jobs Act (TCJA; P.L. 115–97), enacted on December 22, 2017, dramatically reduces the statutory corporate tax rate from 35 percent to 21 percent. It is projected to cost the U.S. Treasury over $1.3 trillion over the next 10 years. Given widespread Republican concerns about federal budget deficits just eight years ago, it seems odd to call for tax changes that lower rates, reduce tax revenue, and increase deficits. The putative impetus for these calls is the belief that the statutory corporate income tax rate is too high, putting an excessive burden on U.S. corporations that leads to poor economic performance. This article examines corporate income-tax rates between 1946 and 2016 (before TCJA), and the argument linking low corporate tax rates with higher economic growth. This analysis finds no evidence that high corporate tax rates have a negative impact on economic growth. The new lower corporate income-tax rate is unlikely to spur economic growth.

‘Earnings shocks and tax-motivated income-shifting: evidence from European multinationals’ – revisited

ABSTRACTThis article revisits the study by Dhammika Dharmapala and Nadine Riedel on income shifting between European multinationals published in the Journal of Public Economics in 2013. It used a promising alternative causal identification strategy for profit-shifting based on earnings shocks, which has over a short time period been frequently cited in the literature. Using data from the same database, albeit for a period 10 years later, for 2006–2015, the significant causal evidence for profit-shifting from European parent firms to their lower taxed European subsidiaries cannot be reproduced. Neither can similar results be obtained by considering profit-shifting to subsidiaries located anywhere in the world. Results in line with those of the original study can however be found when using effective rather than statutory corporate tax rates. While these findings raise concerns about the external validity of earlier studies’ result, it should not put the existence and extent of profit-shifting into question. It rather raises concerns about the focus on statutory tax rates in measuring profit-shifting. Moreover, rather than a decrease in profit-shifting, it may illustrate the database’s and the methodology’s limitations and ability to capture all shifts and channels.

Transfer Pricing by Multinational Firms: New Evidence from Foreign Firm Ownerships

Using a firm-level dataset of Danish exports between 1999–2006, we find robust evidence for profit shifting by multinational corporations. Our triple difference estimations exploit the response of export unit values to acquisitions of foreign affiliates and to changes in statutory corporate tax rates. This identification strategy corrects for a downward bias resulting from firms adjusting arm's length prices to obscure transfer price manipulations. We find that Danish multinationals reduce the unit values of their exports to low tax countries between 5.7 to 9.1 percent. This difference corresponds to a tax revenue loss of 3.24 percent of Danish multinationals' tax returns. (JEL D21, D22, F14, F23, H25, H32)

The Influence of Taxes and Tax-Related Factors on Debt-Shifting in Mergers & Acquisitions

The study examines the influence of taxes and tax related factors on debt-shifting towards targets after the merger or acquisitions (M&A) in an international context. The M&A serves as a natural experiment of the change in the companies’ structure when the newly acquired target becomes a subsidiary in the enlarged conglomerate. The debt-to-asset ratio of the target is positively correlated with the statutory corporate tax rate in its country. The tax incentives to shift debt related to the differences in size, tangible assets and profitability between the target and acquirer are economic significant, supporting the tax-based trade-off theory. The net operating loss carry forwards, particular in the case of unrestricted loss compensation when the target is taken over, have a crowding out effect on leverage. The use of holdings by financial acquirers to take over companies, particularly loss making ones, in cross-border transactions has a positive effect on targets’ leverage in addition to the trade-off theory based debt-shifting incentives. The research complements previous studies that focused on pure tax effects in M&As by considering the interaction with tax-related factors, such as holding structures and loss carry forwards in an international context, and by advancing the modeling of tax incentives according to the trade-off theory.

Macroeconomic Effects of Aggregate Corporate Tax Avoidance: A Cross-Country Analysis

We re-examine the relation between corporate taxes and future macroeconomic growth. Prior studies in the economics literature present contradictory evidence on this relation. We argue that the mixed evidence in the prior literature is at least partly due to the use of statutory corporate tax rates which ignore the complexity of tax credits, tax exemptions, tax deductions, tax enforcement and firms’ tax planning. Consistent with these concerns, we document that the relation between future economic growth and statutory corporate tax rates are sensitive to choice of economic growth proxies, model specification and control variables. We propose an alternative tax burden measure that aggregate cash effective tax rates of listed firms, a common measure of firm-level tax avoidance, and find a strong and robust positive relation between country-level tax avoidance and future macroeconomic growth. This finding is further supported by a positive relationship between firm-level corporate tax avoidance and future firm-level investment. In cross-sectional tests, the positive relationship between aggregate corporate tax avoidance and future economic growth appears to be driven by countries with higher levels of government corruption and with higher levels of corporate tax planning as opposed to government granted tax incentives.