The Effect of Corporate Taxes on Investment and Entrepreneurship

TLDR

The study presents new data on effective corporate income tax rates for 85 countries in 2004. The authors compiled the data via a joint survey with PricewaterhouseCoopers covering all taxes levied on a standardized mid‑size domestic firm. The analysis finds that higher effective corporate tax rates strongly reduce aggregate investment, foreign direct investment, and entrepreneurial activity, affect manufacturing investment but not services, and are linked to a larger informal economy, with results robust to numerous controls. JEL codes: E22, F23, G31, H25, H32, L26.

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. Corporate tax rates are correlated with investment in manufacturing but not services, as well as with the size of the informal economy. The results are robust to the inclusion of many controls. (JEL E22, F23, G31, H25, H32, L26)