The global “race to the bottom” of corporate taxes over the past decades has implicitly been that it promotes growth. Does he do it yet?
The idea that corporate tax cuts could improve economic growth has long occupied researchers. The claim that a wave of corporate tax cuts will lift all boats through increased growth has been a central part of the “supply-side” economy, from Ronald Reagan’s US presidency in the 1980s to the opportunist power politics of his current successor, Donald Trump. . And in current economic policy debates about how to recover from the pandemic, this notion has found political supporters in a number of European countries, including conservative and liberal parties in Germany, facing the fall Bundestag elections.
The supposed effects of corporate taxation on growth are also relevant to the recent debate among the G7 and G20 on a global minimum tax rate for multinationals and, where appropriate, on the threshold level. to fix. While the new US administration led by Joe Biden argues that the growth effects of previous tax cuts have often been overstated, those who advocate caution counter that a minimum tax will have a negative impact on growth – and more the minimum, the greater the impact.
One camp argues that tax cuts will increase profit margins, which will improve investment and therefore growth and jobs; the other doubts this mechanism, pointing to the opportunity costs of lower tax revenues. But what does economic theory suggest?
In the neoclassical growth model associated with veteran American economist Robert Solow, long-term growth stems from exogenous technological progress. Fiscal policy cannot then “only” affect the level of gross domestic product and the transition to stable growth. Lower corporate taxes encourage business savings and investment and therefore imply higher GDP in the long run.
In recent “endogenous” growth models, corporate tax cuts can also have a positive impact on the long-term growth rate, by boosting total factor productivity (which is added to capital and labor). discrete) and innovation. Since the ultimate tax incidence would be borne by natural persons (shareholders, workers and consumers) anyway, and tax pass-through is associated with efficiency losses, some standard models argue that the optimal rate corporate tax should therefore be zero.
Others, however, argue that higher taxation of capital can promote economic growth, by shifting the tax burden from labor and / or by financing productive public spending. Moreover, since corporate tax cuts tend to benefit richer households with a low propensity to consume, they generate little growth on the demand side. Supply-side effects are also expected to be much smaller when they benefit higher-income households.
Nonetheless, the dominant theoretical prediction, upon which most empirical work is based, remains that corporate tax cuts promote growth.
Empirical studies have examined the growth effects of business taxation for different groups of countries and time periods, using different datasets and econometric methods. Relevant factors include how studies measure tax changes (whether in statutory or effective rates or in revenue from production), how they address endogeneity (because growth in turn affects tax revenue ), whether they focus on short- or long-term effects, which countries and time periods they select, and whether they control other items in the budget (other taxes or government spending).
A careful reading of the literature suggests that the reported results vary considerably. Some studies find substantial and strong positive effects on the growth of corporate tax cuts. But others report significantly negative, insignificant, or mixed results.
In a meta-review, we collect 441 estimates from 42 primary studies. We apply the Meta-Analysis Toolkit to analyze the magnitude of the precision-weighted effect (assigning greater importance to studies with more precise results) when corrected for factors that may introduce bias. And we provide model-based results on the impact of certain data and choice of specifications on the estimates reported in the literature.
Imprecise positive growth effects
The graph below shows that the results are indeed very dispersed and have varying precision. The strongest positive growth effects of corporate tax cuts reported in the literature tend to be imprecise: they have large standard errors. The unweighted average of studies suggests that a one percentage point reduction in corporate tax is associated with an increase in economic growth of around 0.02 percentage point per year – a moderate but significant effect (a 10 percentage point cut in corporate tax rates would imply a 0.2 percentage point increase in GDP growth).
This result could, however, be affected by selection in the publication process: study authors and journal editors might prefer results that are consistent with theory and that are meaningful, leading to publication bias. Examining the correlation between the estimated effect size and its standard error can help determine whether such a bias exists – in its absence, econometric theory suggests that there should not be a systematic correlation.
However, we find a negative and significant correlation, which implies that the growth effects of corporate tax cuts are overestimated. When we control the influence of this publication bias, we find ourselves without a positive effect of the corporate tax cuts on growth rates: we can no longer reject the null effect hypothesis.
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We confirm this result using several approaches to detect publication bias. All of our estimates find an insignificant effect of corporate tax cuts on economic growth, close to zero. It is four to five times more likely to publish a statistically significant growth enhancing effect of a corporate tax cut than to publish a non-significant effect.
Our study provides further information on the factors relevant to explaining the greater or lesser effects on growth of corporate tax cuts.
First, the samples of countries (members of the Organization for Economic Co-operation and Development or non-OECD countries) do not seem to make a significant difference. developed countries versus emerging markets. Second, recent studies tend to find less pro-growth effects of corporate tax cuts. Third, controlling public spending seems relevant: tax cuts are a little more favorable to growth when public spending is not cut at the same time. This result is consistent with endogenous growth theory, which suggests that using government revenue from corporate taxation to increase (productive) government spending can have positive effects on growth.
Our results suggest that the prominent role given to corporate tax cuts in policy debates is overstated. While tax cuts have boosted international tax competition in recent decades, they do not appear to have helped growth.