Thursday, January 26, 2012

IMF: race to the bottom on tax in developing world

From the IMF:
"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."
Note that amid the 'race to the bottom' on tax, even if revenues hold up, the structure of tax systems will inevitably become more regressive than they would otherwise have been - since tax rates on flighty mobile forms of capital (the forms that benefit the wealthiest sections of society) will tend to fall, while taxes on less mobile forms of capital will often rise to compensate.

Read more about this broad area here. In particular, see this post How tax competition harms developing countries, looking at earlier IMF research on this subject.

Still, this has just come out and we haven't had a chance to read it properly yet. More on this soon.

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