Corporate Taxation under Weak Enforcement
-
Pierre Bachas
-
Mauricio Soto
- American Economic Journal: Economic Policy (Forthcoming)
Abstract
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%,
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.
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