An Analysis of the Corporate Income Tax Policy of Less Developed Countries

• Date: 01 April 2018
• Published date: 01 April 2018
• Author: Paul L. Baker
• DOI: http://doi.org/10.1111/sjoe.12237

©The editors of The Scandinavian Journal of Economics 2017.

Scand. J. of Economics 120(2), 400–427, 2018

DOI: 10.1111/sjoe.12237

An Analysis of the Corporate IncomeTax

Policy of Less Developed CountriesÅ

Paul L. Baker

University of Bath School of Management, Bath BA2 7AY, UK

p.l.baker@bath.ac.uk

Abstract

Unlike in developed countries, corporate rather than personal tax is the greater source

of public finance for less developed countries (LDCs). This paper analyzes the corporate

income tax policy for a large panel of LDCs. The analysis shows that although the

corporate tax rate has been decreasing, corporate tax revenues have been increasing.

Contrary to standard tax competition theory, there is also strong evidence that corporate

income taxes are increasing with respect to the LDCs’ openness, as measured by capital

mobility. The analysis also shows that the corporate tax rate is increasing with respect

to the personal tax rate, as income-shifting theory predicts.

Keywords: Corporate tax rates; corporate tax revenues; less developed countries

JEL classification:H25; H87

I. Introduction

There is a large body of literature that analyzes the corporate tax policy of

developed countries. However, despite the stark contrast in tax structure,

relatively little work has been done that is specific to the corporate tax

policy of less developed countries (LDCs). In the extensive survey of

the empirical tax competition literature by Leibrecht and Hochgatterer

(2012), 83 percent of the papers include only developed countries in their

sample, and the remaining 17 percent use a mix of developed countries

and LDCs. Therefore, this paper focuses on the corporate tax policy of

LDCs by analyzing the trends and determinants of the corporate tax rates

and corporate tax revenues of 114 LDCs for a 27-year period.

By definition, the economies of developed countries are different from

those of developing or transitioning economies. One should not assume

that the corporate tax policy of developed countries is, or even should be,

the same for LDCs. The tax mix of the respective economies highlights

*I thank the referee for invaluable comments. I also thank Thomas Crossley, Toke Aidt, and

the Applied Microeconomics group (University of Cambridge). Further thanks go to Chris

Dawson and seminar participants at the University of Bath and Ludwig Maximilian University

of Munich. Any remaining errors are my own.

P. L. Baker 401

this difference. The ratio1of the (averaged) personal tax revenue as a

percentage of GDP to the (averaged) corporate tax revenue as a percentage

of GDP for OECD countries is approximately 2.3 : 1. The same ratio2

calculated for the sample of LDCs examined here is approximately 0.7:1.

Relatively speaking, personal tax revenues are more important than corporate

tax revenues for developed countries, while the reverse holds true for

LDCs: corporate tax revenues are more important than personal tax revenues.

Furthermore, the corporate tax policy of LDCs has become increasingly

topical. When the UK assumed the presidency of the G8 in 2013, one

of the key items it highlighted for its agenda was to advise developing

countries on their tax policy in order to assist them in becoming financially

self-sufficient.3To be able to provide this advice, an important step should

be a better understanding of the corporate tax policy of LDCs. The current

empirical corporate tax policy literature does not yet sufficiently provide

this understanding. Therefore, this paper extends the literature to LDCs.

To gain context, a trend analysis is conducted to develop a series of

stylized facts regarding the corporate tax rates and revenues of LDCs.

Using regression analysis, the paper then investigates the domestic and

international determinants of the corporate tax rates of LDCs. Finally, the

determinants of LDC corporate tax revenues are analyzed through a series

of regressions. The three analyses are done for a panel dataset consisting

of only LDCs for the years 1980–2006.

This paper also compares and contrasts the resulting evidence for its

sample of LDCs to that which has been previously reported for developed

countries. Similar to the evidence for developed countries (Devereux et al.,

2002), LDCs are experiencing the predicted decreasing trend in corporate

tax rates. However, where a stable trend in corporate tax revenues has

been reported for developed countries (Devereux et al., 2002), the evidence

found here shows that corporate tax revenues have been increasing for

LDCs, both as a percentage of GDP and as total tax revenues. In analyzing

the determinants, this paper also finds – surprisingly – no evidence of

a link between the revenue needs of the government of an LDC and

the level of the corporate tax rates that it sets. This is similar to the

lack of evidence of this relationship in developed countries (Slemrod,

1This ratio is computed for the year 2010 based on the statistics available online from the

OECD iLibrary (http://www.oecd-ilibrary.org/).

2This ratio is computed for the year 2010 based on the data available online from the

Government Finance Statistics Yearbook, 2013 (IMF, 2014).

3See the article on the BBC News web site “Nick Clegg aims to stop ‘gaming’

of tax systems in developing world”, available at http://www.bbc.co.uk/news/uk-politics-

21437036 (February 13, 2013).

©The editors of The Scandinavian Journal of Economics 2017.