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The Effect of Corporate Taxes on Investment and Entrepreneurship

67 Pages Posted: 30 Jan 2008 Last revised: 4 Aug 2010

Simeon Djankov

London School of Economics & Political Science (LSE); Peter G. Peterson Institute for International Economics

Tim Ganser

Harvard University - Department of Economics

Caralee McLiesh

World Bank - International Finance Corporation (IFC)

Rita Maria Ramalho

World Bank Group - Private Sector Advisory Services Department

Andrei Shleifer

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2008

Abstract

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.

Suggested Citation

Djankov, Simeon and Ganser, Tim and McLiesh, Caralee and Ramalho, Rita Maria and Shleifer, Andrei, The Effect of Corporate Taxes on Investment and Entrepreneurship (January 2008). NBER Working Paper No. w13756. Available at SSRN: https://ssrn.com/abstract=1088670

Simeon Djankov (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Tim Ganser

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

Caralee McLiesh

World Bank - International Finance Corporation (IFC) ( email )

2121 Pennsylvania Avenue, NW
Washington, DC 20433
United States

Rita Maria Ramalho

World Bank Group - Private Sector Advisory Services Department ( email )

Washington, DC 20433
United States

Andrei Shleifer

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-5046 (Phone)
617-496-1708 (Fax)

HOME PAGE: http://www.economics.harvard.edu/~ashleife/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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