The Effects of Corporation Tax Rate Reduction on Corporate Tax Burden, Investment and Financial Activities
Asian Tax Journal Vol. 9 No. 4 (2008), pp. 249-283
Abstract
The government cut the corporation tax rate for boosting investment and enhancing competitiveness of corporations. This paper empirically analyzed whether corporation tax rate reduction induced the decrease of corporate actual tax burden, and whether how it affected the investment and financial activities of corporations. In order to analyze the effects of tax rate reduction which was applied since 2005, I used univariate and multivariate analysis method for the listed companies during the period of 2003－2006. The results of this study are as follows. First, the reduction of nominal corporation tax rate led to the decline of the effective corporation tax rate, but the degree of decrease in the effective tax rate is smaller than that of decrease in the nominal tax rate. Second, It was found that the reduction of corporation tax rate didn't significantly affect the investment in tangible assets such as plants & equipment. Third, R&D investment sharply increased after the corporation tax rate cut. Forth, It was shown that there was a significant relation between the reduction of corporation tax rate and variation of debt, and the corporate debt increased further after corporation tax rate was reduced. Fifth, there was no big difference in dividend payout ratio even after corporation tax rate was reduced, therefore no significant relation between the corporation tax rate reduction and the dividend payout ratio. Given the above results of the research, The purpose of corporation tax rate reduction policy has been partially achieved if the reduction aimed to reduce the tax burden and increase investment of companies. However the purpose has not been achieved if it aimed to increase investment in tangible assets. In this regard, it is necessary to implement other tax incentives in addition to the tax rate reduction in order to achieve the policy purposes. Since the application target and impact of the tax policy using corporation tax rate is so wide and extensive that the corporation tax rate policy is inappropriate to achieve the specific policy goal. It can also lead to unexpected results than its original intention.
Keywords
- corpoation tax rate
- effective corporation tax rate
- investment in tangible asset
- R&D investment
- variation of debt
- variation of dividend
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