Skip to content

Studies on Business Taxes

6 min read

2008, Organization for Economic Cooperation and Development, “Tax and Economic Growth,” Economics Department Working Paper No. 620, July 11, 2008.

In a blockbuster new study, economists at the Organization for Economic Cooperation and Development studied the effects of various types of taxes on the economic growth of developed nations within the OECD and found that “corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. es.”

The empirical evidence suggests that “investment is adversely affected by corporate taxation through the user cost of capital”, meaning the after-taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. return on investment. Looking at the firm-level, the economists found that the effect of corporate taxes is strongest on industries that are older and more profitable because of their larger tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. s.

Statutory corporate tax rates have a negative effect on firms that are in the “process of catching up with the productivity performance of the best practice firms.” This suggests that “lowering the corporate tax rate may be particularly beneficial for productivity growth of the most dynamic and innovative firms. This could be because such firms rely heavily on retained earnings to finance their growth.”[1]

2008, Simeon Djankov, Tim Ganser, Caralee McLiesh, Rita Ramalho, and Andrei Shleifer, The Effect of Corporate Taxes on Investment and Entrepreneurship

The National Bureau of Economic Research explored the effects of corporate income taxes on economies. To measure the effects, researchers from Harvard University and The World Bank looked at 85 nation’s taxation of similar sectors of their economies. They found higher corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rates discouraged entrepreneurship, foreign direct investment and economic growth.

2008, Gregory Mankiw, June 1 2008 New York Times, “The Problem With the Corporate Tax”

Gregory Mankiw, economist at Harvard University, wrote a short article in the New York Times regarding corporate income tax. Professor Mankiw points out that people, not corporations, pay the taxes on business income. Additionally, the author notes many benefits related to lower corporate income taxes including; higher wages, a stronger stock market, larger capital inflows and lower prices for consumers.

2007, Alison Felix, Passing the Burden: Corporate Tax Incidence in Open Economies

This study, by Alison Felix of the Kansas City Federal Reserve Bank, compares data in various countries to determine the effects of corporate income taxation. The results indicate a large portion of the corporate tax burden is passed on to workers. Additionally, the study finds corporate income taxes similarly impact both high and low-skill employees.

2007, David Mitchell, Corporate Taxes: America is Falling Behind

David Mitchell, an economist with the Cato Institute, reports that the United States is losing its edge in global economic competition. Mitchell states the current world tax-competition brings investment to lower nations with lower taxes. He goes on to suggest the resilience and diversity of the United States economy attract investment, but changing corporate income tax policy is necessary for future economic opportunity.

2007, Alex Brill and Kevin A. Hassett, Revenue-Maximizing Corporate Income Taxes

Alex Brill and Kevin A. Hassett, of the American Enterprise Institute, conclude that global tax competition has indeed resulted in lower corporate income tax rates, while tax revenues remained close to previous levels. Additionally, the study suggests that over the past few decades, higher tax rates cause increasingly detrimental effects on tax revenues.

2007, Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr., Labor and Capital Shares of the Corporate Tax

In an unpublished paper, economists from Harvard and the University of Michigan determined how both owners of capital are affected by corporate income taxation. The authors conclude that between 45 and 75 percent of the tax burden falls on labor, while the remainder is borne by shareholders.

2007, Wiji Arulampalam, Michael P. Devereux, and Giorgia Maffini, The Direct Incidence of Corporate Income Tax on Wages

In a 2007 study of corporate income taxes and foreign direct investment, three Oxford economists, study over 55,000 companies across Europe. They concluded that a 1 percent increase in marginal corporate income tax rates, eventually leads to a .92 percent decrease in real wages. This study shows the negative relationship between corporate income taxes and employment.

2006, Jack Mintz, The 2006 Tax Competitiveness Report: Proposals for Pro-Growth Tax Reform

Canada shares many economic scenarios with the United States. This paper, written by Jack Mintz of the C.D. Howe Institute, calls for reforming the Canadian tax system to allow for further competition among developing states. With an effective tax rate lower than the US, Canada still looks to future reforms to remain competitiveness. The study emphasizes the importance of tax incidenceTax incidence is a measure of who ultimately pays a tax, either directly or through the tax burden. This burden can be split between buyers and consumers, or different groups in the economy. and reiterates that taxing corporations at higher levels reduces their productivity, wages and overall success in the world economy.

2007, United States Treasury Department, Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21st Century

This United States Treasury Department report provides a comprehensive analysis of tax policy during this period of globalization. The study concludes that the United States must address issues of tax policy to maintain economic competitiveness. The ever changing role of the US economy in the world market requires a shift in public policy. With much of the developed world becoming more and more tax competitive, the US must join the trend of corporate tax reform.

2006, PricewaterhouseCoopers and the World Bank, Paying taxes 2006: The global picture

In a comprehensive report, PricewaterhouseCoopers and the World Bank, make recommendations for countries to engage in tax reform. While the paper does not suggest specific plans of action for specific nations, it provides information on compliance, costs and economic effects of tax policies. Not surprisingly, the United States, in 2006, ranked near the top of nations with time consuming (costly) corporate income tax filing. Additionally, the report calls for moderate rates of taxation to encourage higher levels of compliance.

2006, William Randolph, International Burdens of the Corporate Income Tax

William Randolph, of the Congressional Budget Office, studied the effects of corporate income taxation in a 2006 working paper. He concluded that 70 percent of tax burden passed through to employees, with 30 percent affecting shareholders. As much of the research points out, corporate income taxes fall on workers and share holders, not just the wealthy.

2006, Aparna Mathur and Kevin Hassett, Taxes and Wages

Aparna Mathur and Kevin Hassett, of the American Enterprise Institute, performed a study of the effects of corporate income taxes on wages rates on 72 countries over 22 years. The authors find that wages are, in fact, responsive to corporate income taxes. This study suggests a negative relationship between tax rates and wages, suggesting a 1 percent increase in the corporate income tax rate leads to a 1 percent decrease in real wages.

2004, Young Lee and Roger Gordon, Tax Structure and Economic Growth

Young Lee and Roger Gordon, researchers from the University of California -San Diego and Hanyang University in South Korea, prepared a cross-nation study of taxation and economic growth. The authors assert a strong negative relationship between corporate income taxes and economic growth, implying that higher tax rates impede economic growth. Furthermore, the study extrapolates a 10 percent reduction in corporate income taxes could lead to a 1 to 2 percent increase in economic growth rates.