As Lateral Economics proposed in 2006 if you’re looking for taxes to cut to maximise growth, you can’t go past cutting company tax rates.
Now the research has been updated by this NBER working paper.
Simeon Djankov, Tim Ganser, Caralee McLiesh, Rita Ramalho, Andrei Shleifer
NBER Working Paper No. 13756
Issued in January 2008
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. For example, a 10 percent increase in the effective corporate tax rate reduces aggregate investment to GDP ratio by 2 percentage points. Corporate tax rates are also negatively correlated with growth, and positively correlated with the size of the informal economy. The results are robust to the inclusion of controls for other tax rates, quality of tax administration, security of property rights, level of economic development, regulation, inflation, and openness to trade.
Oh – and there isn’t much evidence that cutting top marginal rates of tax improves economic outcomes (except of course for the direct beneficiaries of such policies).
Postscript on reading further.
Personal income tax does not enter the entrepreneurship regressions (which alleviates the concern that our corporate tax rates are
wrong for entrepreneurship), enters negatively and significantly the FDI regressions (although with small coefficients), and surprisingly enters positively and significantly for aggregate investment. The last result is a fluke caused by China and Vietnam, which have both very high personal tax rates and investment rates. Without them, there is no relationship. Overall, our main findings on corporate income taxes are robust to the inclusion of any of the additional tax rates we have considered. (p. 19 of the paper)