American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
Corporate Taxation under Weak Enforcement
American Economic Journal: Economic Policy
vol. 13,
no. 4, November 2021
(pp. 36–71)
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 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.Citation
Bachas, Pierre, and Mauricio Soto. 2021. "Corporate Taxation under Weak Enforcement." American Economic Journal: Economic Policy 13 (4): 36–71. DOI: 10.1257/pol.20180564Additional Materials
JEL Classification
- D22 Firm Behavior: Empirical Analysis
- H25 Business Taxes and Subsidies including sales and value-added (VAT)
- H26 Tax Evasion and Avoidance
- H32 Fiscal Policies and Behavior of Economic Agents: Firm
- K34 Tax Law
- L25 Firm Performance: Size, Diversification, and Scope
- O23 Fiscal and Monetary Policy in Development