When governments talk about about lowering corporate tax rates they claim there is benefit in one form or another. The problem is the mechanism of how the benefit can work is never explained.

The closest I've seen is that it will result in more investment but often the corporate tax is only after an organisation has made a profit.

Some sort of worked example of how this may affect decision processes or some analysis of changes that have occurred when companies have lowered corporate tax rates will also be nice.


3 Answers 3


I. The case for government revenue

The rationale behind this argument is that it it possible to increase the tax revenue by lowering the tax rate. A. Laffer draw a curve which represent this:

enter image description here

The idea is that if your tax rate is above $t^*$, then taxpayers try to evade taxes, develop the shadow economy, avoid taxes, or simply reduce the amount of work that they do because their is a lesser incentive to do more when the state takes a bigger share of the reward.

So the debate is therefore to know whether we are already beyond this optimal tax rate $t^*$ or below. Emmanuel Saez and Thomas Piketty argue that this optimal tax rate is about 70%. Others, such as Arthur Laffer, believe that it is much lower, and that the government revenue would actually increase if the tax rates were lower.

II. The case for growth

Lower tax rates can also be adopted in order to increase the attractiveness of the country to foreign investors, and hopefully develop the economic activity. Many countries have been known recently to struck tax deals in order to attract business: The UK with Google, Ireland with everybody, Luxembourg with Amazon and others, etc.

Similarly, developing countries tend to create special economic zones where foreign firms can develop their activities and build factories in return for lower taxation.

  • 1
    $\begingroup$ It is an active research question among economists how much of the burden of corporate income tax is borne by the owners of capital. It could well be suppliers, customers, or employees that bear the burden. Here is a nice review: ntanet.org/NTJ/66/1/… They find "In summary, the adjusted estimates that are ... that 62 percent of the corporate tax falls on capital is consistent with parameter values similar to the central values obtained in the empirical literature." $\endgroup$
    – BKay
    Commented Apr 14, 2016 at 17:25

The easiest way to frame the issue is by thinking of corporate taxes as a significant cost faced by firms operating in a market. Lowering corporate taxes will attract more corporations to a market. These corporations enter the market because doing so reduces costs, thereby increasing profits (all other things equal).

The outcome is that by collecting a little bit less tax revenue from each corporation, a market can retain enough existing participants and attract enough new participants so that the slightly lower tax rate generates more tax revenue than the higher tax rate.

That is, governments lower corporate taxes because they believe doing so can actually net them a larger amount of corporate tax revenue.

This is a very simplistic answer and there are obviously other ways to frame the question. For example, a government might lower corporate taxes for a specific sector, knowing they will lose out on tax revenues, in an effort to attract more market participants and increase the rate of innovation in that market.


You know that tax breaks don't go to new investments, companies and people always say "Thank you very much" then don't invest. It has not helped new Zealand, there was a study on this. Also it didn't help when Reagan used his reagonomics and gave tax breaks for the rich. They simply didn't re-invested it. http://www.businessinsider.com.au/study-tax-cuts-dont-lead-to-growth-2012-9?r=US&IR=T Check this link!


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.