The Effect of Corporate Taxes on Investment and Entrepreneurship
London School of Economics & Political Science (LSE); Peter G. Peterson Institute for International Economics
Harvard University - Department of Economics
World Bank - International Finance Corporation (IFC)
Rita Maria Ramalho
World Bank Group - Private Sector Advisory Services Department
Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
NBER Working Paper No. w13756
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. For example, a 10 percent increase in the effective corporate tax rate reduces aggregate investment to GDP ratio by 2 percentage points. Corporate tax rates are also negatively correlated with growth, and positively correlated with the size of the informal economy. The results are robust to the inclusion of controls for other tax rates, quality of tax administration, security of property rights, level of economic development, regulation, inflation, and openness to trade.
Number of Pages in PDF File: 67
Date posted: January 30, 2008
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