Tax impact on entrepreneurship

Studying data across 85 countries, Simeon Djankov et al write in ‘The effect of corporate taxes on investment and entrepreneurship' ( www.ssrn.com ) that effective corporate tax rates have a large and significant adverse effect on corporate investment and entrepreneurship. This effect is robust if the study is controlled for other tax rates, including personal income taxes and VAT and sales tax, for measures of administrative burdens, tax compliance, property rights protection, regulations, economic development, openness to foreign trade, seignorage and inflation, the authors add. “Higher effective corporate income taxes are also associated with lower investment in manufacturing but not in services, a larger unofficial economy, and greater reliance on debt as opposed to equity finance.”

Informal economies are huge, reaching around 35 per cent in lower-middle- and low-income countries, one learns; also, that a 10 percentage point increase in the first year effective tax rate raises the informal economy as a share of economic activity by nearly 2 percentage points. The authors estimate the size of the informal sector as a percentage of the total economy from the Global Competitiveness Report. Among other measures of the informal economy mentioned in the paper are Schneider's (2005), computed using the ratio of tax collections to GDP; and Enterprise Surveys (La Porta and Shleifer 2008), based on tax evasion.

Insights of value, which may be followed up through periodical studies.

Oil the savings

A recent IMF working paper by Reda Cherif and Fuad Hasanov is titled ‘ Oil exporters' dilemma: How much to save and how much to invest ' ( www.ssrn.com ). It begins by stating that policymakers in many commodity-exporting countries confront the question of how much to consume, save and invest out of revenues from commodity exports.

The authors note that in the face of highly volatile commodity (especially, oil) revenues, governments have to balance several objectives at the same time. These objectives include smoothing consumption, ensuring intergenerational equity if a natural resource is exhaustible, managing volatility by building buffer stock/precautionary savings, and investing in capital to promote economic development.

The paper studies how oil exporters should allocate their volatile tradable income among safe liquid assets, domestic investment and consumption over a long horizon. The authors trace how in the late 1970s when the real oil price was high oil exporters on average invested about 30 per cent of GDP. “In contrast, in the 2000s when the oil price was at a comparable level, investment fell to about 20 per cent of GDP.”

A footnote of importance is about the productivity in the tradable sector being low in oil-exporting economies. The authors cite IMF (2011) findings that the average total factor productivity growth was negative or barely positive in Gulf Cooperation Council countries over the past 40 years. “Many oil exporters have invested large amounts, for example, in infrastructure and industrial projects, for decades, but their output of tradables has increased modestly.

Recommended read for policymakers, with relevance to natural resources other than oil, too.

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