A Multinational Analysis of Tax Rates and Economic Activity

Journal of International Business Research, Forthcoming

22 Pages Posted: 9 Jul 2010  

Lawrence C. Smith Jr.

Louisiana Tech University

Murphy Smith

Murray State University - Accounting Department

William C. Gruben

Texas A&M International University

Date Written: 2010

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.

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

JEL Classification: F23, G15, M41

Suggested Citation

Smith, Lawrence C. and Smith, Murphy and Gruben, William C., A Multinational Analysis of Tax Rates and Economic Activity (2010). Journal of International Business Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1636010

Lawrence C. Smith Jr.

Louisiana Tech University ( email )

P.O. Box 3178
Ruston, LA 71272
United States

Murphy Smith (Contact Author)

Murray State University - Accounting Department ( email )

Murray, KY 42071-3314
United States
270-809-4181 (Phone)

William C. Gruben

Texas A&M International University ( email )

Laredo, TX 78041
United States

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