A Multinational Analysis of Tax Rates and Economic Activity

Abstract:     
The relationship between taxes, particularly the income tax, and economic activity is a factor in the economic progress and development of a national economy. This study examines the relationship between the corporate income tax rate and economic activity in 30 countries, the members of the Organization of Economic Cooperation and Development. Results indicate that lower tax rates are associated with more favorable economic activity, including growth in GDP, lower unemployment, and higher savings. These findings suggest that at the micro-level, corporate managers should consider tax rates when deciding to locate or not locate business operations within a given country, especially if the goal is to locate where the economy is dynamic. At the macro-level, before making changes to tax law, policy makers should carefully consider how tax rates affect economic activity. For example, policy makers in the US Congress, at the time of this writing, are considering whether to allow the Bush tax cuts to expire in 2010. If the Congress allows that to happen, the outcome would effectively be the largest tax increase in US history.

Number of Pages in PDF File: 22

Keywords: multinational, income tax, economics, tax policy, tax increase, corporate tax rate

JEL Classification: F23, G15, M41

Accepted Paper Series