A Partial Race to the Bottom: Corporate Tax Developments in Emerging and Developing Economies

By Junhyung Park, Sukhmani Bedi, S. M. Ali Abbas, Alexander D Klemm

January 1, 2012

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Junhyung Park, Sukhmani Bedi, S. M. Ali Abbas, and Alexander D Klemm. A Partial Race to the Bottom: Corporate Tax Developments in Emerging and Developing Economies, (USA: International Monetary Fund, 2012) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Average effective tax rate, Corporate income tax, Effective tax rate, Marginal effective tax rate, Revenue administration, Tax policy, Taxes

Keywords: Africa, Average effective tax rate, Capital tax elasticity, Corporate Income Tax, Corporate tax, Developing Economies, Economic rent, Effective tax rate, Effective Tax Rates, Emerging Markets, Europe, GDP, Global, Investment, Investment impact, Lowering tax rates, Low-Income Countries, Marginal effective tax rate, Present discounted value, Regime data, Revenue, Special Economic Zones, Sub-Saharan Africa, Tax competition, Tax rate, Tax rate cut, WP

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/028
Stock No:

WPIEA2012028
ISBN:

9781463933135
ISSN:

1018-5941

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