How should developing countries tax corporate income? We study this question in Costa Rica, where firms face higher average tax rates on profits when revenues marginally increase. We combine discontinuity and bunching designs to estimate the elasticity of taxable profit and separate it into revenue and cost elasticities. We find that firms faced with a higher tax rate slightly reduce revenues but considerably increase costs, thus producing a large elasticity of taxable profit of 3–5. In this context, the revenue-maximizing rate for a corporate tax on profit is below 25 percent, and we show that a tax policy that broadens the base while lowering the rate can almost double the tax revenue collected from these firms.
Bachas, Pierre, and Mauricio Soto.
"Corporate Taxation under Weak Enforcement."
American Economic Journal: Economic Policy,
Firm Behavior: Empirical Analysis
Business Taxes and Subsidies including sales and value-added (VAT)
Tax Evasion and Avoidance
Fiscal Policies and Behavior of Economic Agents: Firm
Firm Performance: Size, Diversification, and Scope
Fiscal and Monetary Policy in Development