Corporate tax rates have been in decline for over two decades. This is true globally, although cuts have been more significant among developed nations where initial rates tended to be higher. Significant increases in trade, foreign direct investment and globalization have occurred over the same period, and increased capital mobility may have led to increased rewards from tax competition. In addition, clever tax managers may be able to use direct investment and transfer pricing to locate profits in low tax countries with increasing competence. If so, the benefits of being a low tax country, and costs of being a high tax country, might be significantly higher today than they were in the early 1980s.
A consequence of increased capital mobility may be declining corporate revenues resulting from high tax rates. Multinational firms could, in theory, move activities so elastically between localities that revenues decline if rates are high relative to one's neighbors. In a world without such mobility, countries may even be able to hold capital "captive" and reap healthy revenues with high rates. The question is ultimately empirical.
This note explores a data set of corporate tax rates and collections for OECD countries (1980-2005) to identify the empirical relationship between corporate tax revenues and rates. We use nonlinear regression techniques in order to model this relationship in Laffer curve form. We explore the existence of a revenue maximizing rate and estimate its trend over time. . . .
Alex Brill is a research fellow at AEI. Kevin A. Hassett is a senior fellow and director of economic policy studies at AEI.