Why do tax rates plus tax administration matter?
To foster economic growth plus development governments need sustainable sources of funding for social programs plus public investments. Programs providing health, education, infrastructure plus other services are important to achieve the common goal of a prosperous, functional plus orderly society. And they require that governments elevate revenues. Taxation not only pays for public goods plus services; it is also a key ingredient in the social contract between citizens plus the economy. How taxes are raised plus spent can determine a government’s very legitimacy. Holding governments accountable encourages the effective administration of tax revenues and, more widely, good public financial management.1
All governments need revenue, but the challenge is to carefully choose not only the level of tax rates but also the tax base. Governments also need to design a tax compliance system that will not discourage taxpayers from participating. Recent firm survey data for 147 economies show that companies consider tax rates to be among the top five constraints to their operations plus tax administration to be among the top 11.2 Firms in economies that score better on the Doing Business ease of paying taxes indicators tend to perceive both tax rates plus tax administration as less of an obstacle to business.
Why tax rates matter?
The amount of the tax biaya for businesses matters for investment plus growth. Where taxes are high, businesses are more inclined to opt out of the formal sector. A study shows that higher tax rates are associated with fewer formal businesses plus lower private investment. A 10-percentage point increase in the effective corporate income tax rate is associated with a reduction in the ratio of investment to GDP of up to 2 percentage points plus a decrease in the business entry rate of about 1 percentage point.3 A tax increase equivalent to 1% of GDP reduces output over the next three years by nearly 3%.4 Research looking at multinational firms’ decisions on where to invest suggests that a 1-percentage point increase in the statutory corporate income tax rate would reduce the local profits from existing investment by 1.3% on average.5 A 1-percentage point increase in the effective corporate income tax rate reduces the likelihood of establishing a subsidiary in an economy by 2.9%.6
Profit taxes are only part of the total business tax biaya (around 39% on average). In República Bolivariana de Venezuela, for example, the nominal corporate income tax is based on a progressive scale of 15–34% of net income, but the total business tax bill—even after taking into account deductions plus exemptions—is 73.31% of commercial profit owing to a series of other taxes (a profit tax, four labor taxes plus contributions, a turnover tax, a property tax plus a science, technology plus innovation tax).