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A Partial Race to the Bottom

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Author Info

  • Junhyung Park
  • Sukhmani Bedi
  • S. M. Ali Abbas
  • Alexander Klemm

Abstract

This paper assembles a new dataset on corporate income tax regimes in 50 emerging and developing economies over 1996-2007 and analyzes their impact on corporate tax revenues and domestic and foreign investment. It computes effective tax rates to take account of complicated special regimes, such as partial tax holidays, temporarily reduced rates and increased investment allowances. There is evidence of a partial race to the bottom: countries have been under pressure to lower tax rates in order to lure and boost investment. In the case of standard tax systems (i.e. tax rules applying under normal circumstances), the effective tax rate reductions have not been larger than those witnessed in advanced economies, and revenues have held up well over the sample period. However, a race to the bottom is evident among special regimes, most notably in the case of Africa, creating effectively a parallel tax system where rates have fallen to almost zero. Regression analysis reveals higher tax rates adversely affect domestic investment and FDI, but do raise revenues in the short-run.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/28.

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Length: 31
Date of creation: 01 Jan 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/28

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Related research

Keywords: Emerging markets; Corporate taxes; Developing countries; Tax systems; tax rate; tax competition; corporate tax; effective tax rates; tax revenues; corporate income tax; tax revenue; tax system; corporate tax rates; statutory tax rate; direct investment; foreign direct investment; depreciation allowances; average tax rate; international tax; discounted value; corporate tax revenue; private investment; domestic investment; marginal tax rate; investment allowances; tax rate changes; total tax revenue; corporate income tax revenues; tax increases; income tax revenues; tax policy; capital stock; investors; tax liability; corporate tax revenues; foreign investment; corporate taxation; higher tax rates; national tax journal; tax journal; tax administrations; economic zones; private capital; tax reductions; corporate tax rate; special economic zones; tax rate reductions; tax planning; gross fixed capital formation; income tax rate; tax changes; statutory corporate tax rates; foreign investors; fixed capital; lower tax rates; international tax competition; high tax rates; tax allowance; rate of return; business tax; tax regime; personal taxes; retained earnings; taxable profits; harmful tax; harmful tax competition; tax reform; corporate tax incentives; tax receipts; corporate income taxes; income tax rates; business taxes; tax revenue ratio; cost of capital; business investment; rates of return; tax capacity; tax advantages; reinvestment; capital tax; tax reforms; tax on capital; tax rate cuts; income taxes; present value of taxes; indirect taxes;

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References

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  1. Janeba, Eckhard & Smart, Michael, 2003. "Is Targeted Tax Competition Less Harmful Than Its Remedies?," International Tax and Public Finance, Springer, vol. 10(3), pages 259-80, May.
  2. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition," Economic Policy, CEPR & CES & MSH, vol. 17(35), pages 449-495, October.
  3. Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
  4. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  5. A. Klemm & S. Van Parys, 2010. "Empirical Evidence on the Effects of Tax Incentives," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 10/673, Ghent University, Faculty of Economics and Business Administration.
  6. Michael Keen & Mario Mansour, 2010. "Revenue Mobilisation in Sub-Saharan Africa: Challenges from Globalisation II - Corporate Taxation," Development Policy Review, Overseas Development Institute, vol. 28(5), pages 573-596, 09.
  7. Alexander Klemm, 2008. "Effective Average Tax Rates for Permanent Investment," IMF Working Papers 08/56, International Monetary Fund.
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Cited by:
  1. David Nguyen-Thanh & Christoph Strupat, 2012. "Is the Burden Too Small? – Effective Tax Rates in Ghana," Ruhr Economic Papers 0389, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.

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