Macroeconomic Implications of Changes in Corporate Tax Rates: A Review

• Published date: 01 March 2023
• Author: Sacchidananda Mukherjee,Shivani Badola
• Date: 01 March 2023
• DOI: http://doi.org/10.1111/1467-8462.12497

The Australian Economic Review, vol. 56, no. 1, pp. 20–41 DOI: 10.1111/1467-8462.12497

Macroeconomic Implications of Changes in Corporate Tax

Rates: A Review

Sacchidananda Mukherjee and Shivani Badola*

Abstract

Many countries have initiated structural re-

forms in corporate income tax (CIT) to attract

investment and promote growth. There has

been a continuous decline in CIT rates

worldwide. It is expected that cuts in CIT

rates may increase after‐tax profits and

encourage investment. A change in the CIT

rate may also be shifted backward (by

changing salaries and wages) and/or forward

(by changing product prices). These are

theoretical possibilities and may not have

support from empirical evidence. In this paper

we review empirical studies to assess the

impact of CIT rate changes on the economy.

1. Introduction

Given the importance of tax policy in public

finance management, many countries have

taken up structural reforms in tax systems.

Tax reforms in corporate income tax (CIT)

have been undertaken to foster competition

and investment (domestic as well as foreign)

and to encourage growth. The need for tax

reforms in CIT is always felt when there are

high effective tax rates, a narrow tax base, an

uncertain tax environment, and international

pressure to keep the rates low to minimise

base erosion and profit shifting (BEPS).

Over the last 40 years, there has been a

continuous decline in CIT rates worldwide

(Figure 1). The average CIT rate of 177 tax

jurisdictions has declined from 46.5 per cent

in 1980 to 25 per cent in 2020, when weighted

by the GDP of respective countries (Figure 1).

Declines in CIT rates have occurred in all

major regions of the world, including the

largest economies (Bray 2021). For example,

in 2017 the statutory corporate tax rate in the

United States was the fourth highest in the

world. Under the Tax Cuts and Jobs Act

legislation, the US federal CIT rate was

reduced from 35 per cent to 21 per cent in

2018. The overall average CIT rate in the

United States (including the States' portion of

corporate tax rate when weighted by popula-

tion) was reduced to 25.7 per cent in 2018

which is closer to the OECD average (Bray

2021). In 2021, most countries had corporate

tax rates below 30 per cent (Figure 2). As of

FY 2019–20, India has also reduced CIT rates

* National Institute of Public Fin ance and Policy, 18/2,

Satsang Vihar Marg, New Delhi, India. Corresponding

author: Sacchidananda Mukherjee, email: <sachs.mse@

gmail.com>

© 2022 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research, Faculty of Business

and Economics.

Published by John Wiley & Sons Australia, Ltd

for domestic and new manufacturing compa-

nies to 22 per cent (down from 30 per cent)

and 15 per cent (down from 25 per cent)

respectively, subject to the condition that they

will not avail themselves of any tax exemption

schemes. Now in India the effective tax rate

(inclusive of all surcharges and cesses) for

domestic companies is 25.17 per cent and for

new domestic manufacturing companies it is

17.01 per cent (Ministry of Finance 2019).

Figure 1 Statutory Weighted and Unweighted CIT rates, 1980–2021

Source: Bray (2021)

Figure 2 Distribution of Worldwide Statutory Corporate Income Tax Rates

Source: Bray (2021)

21Mukherjee and Badola: Changes in Corporate Tax Rates

© 2022 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research, Faculty of Business

and Economics.