Corporate Taxation under Weak Enforcement

Pierre Bachas and Mauricio Soto

American Economic Journal: Economic Policy, 2021, vol. 13, issue 4, 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.

JEL-codes: D22 H25 H26 H32 K34 L25 O23 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (25)

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DOI: 10.1257/pol.20180564

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