The Elusive Impact of Corporate Tax Incentives

11061 The Elusive Impact of Corporate Tax Incentives Massimiliano CalìGiorgio PresidenteThiago Scot Economic Policy Global Department—TradeFebruary 2025 A verified reproducibility package for this paper isavailable athttp://reproducibility.worldbank.org,clickherefor direct access. Policy Research Working Paper11061 Abstract Despite the large fiscal footprint of corporate tax incentives,limited causal evidence exists on their impact on economicoutcomes. This paper helps fill this gap by exploiting thephasing out of a large income tax exemption scheme forexport- oriented firms in Tunisia. Using data on the uni-verse of registered Tunisian firms, the analysis shows thatthe reform caused a decline in the entry of new firms in thesector previously benefiting from the incentives. However, the reduced entry did not translate into any effects onemployment, revenue, or the wage bill, as the reform didnot impact the activities of incumbent firms, which accountfor the bulk of economic activity in Tunisia. The findingsare robust to addressing various threats to the empiricalidentification, and they confirm emerging evidence castingdoubt on the importance of tax incentives to determineinvestments relative to other factors in an economy. This paper is a product of the Economic Policy Global Department—Trade. It is part of a larger effort by the World Bankto provide open access to its research and make a contribution to development policy discussions around the world. PolicyResearch Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contactedat mcali@worldbank.org; giorgio.presidente@unibocconi.it; and tscot@worldbank.org. A verified reproducibility packagefor this paper is available athttp://reproducibility.worldbank.org, clickherefor direct access. The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about developmentissues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry thenames of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely thoseof the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank andits affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. TheElusiveImpactofCorporateTaxIncentives MassimilianoCalì∗1,GiorgioPresidente2,andThiagoScot3 1WorldBank2BocconiUniversity3WorldBank Keywords:Tax Incentives, Corporate Income Tax, Export-oriented firms, BusinessInvestment JEL classification: H25, H32 1Introduction Tax incentives are a ubiquitous component of policies aiming to attract investment andboost exports. OECD (2022) estimates that in 2022, 87% of the 52 developing economiessurveyed had at least one type of Corporate Income Tax (CIT) exemption, while 69%and 65% had at least one type of reduced CIT rate or tax allowance, respectively. Theseincentives are economically significant.According to data collected by Redonda et al.(2024), tax relief schemes to businesses amounted to 1.4% of global GDP and 7.8% ofglobal tax revenues in 2021. In spite of the large footprint of these incentives, there is limited evidence on theircausal impact on economic outcomes.A key reason is that changes in taxation areoften bundled within broader policy packages that provide a wide range of benefits foraffected firms. Special Economic Zones are a case in point. These regimes often includepreferential customs rules, flexibility in labor regulations, and a range of tax benefitssuch as exemption from import duties, VAT on local purchases and, often, exemption onCIT. As the precise mix of benefits being offered varies among countries and over time,any assessment of one specific intervention will necessarily bundle all of these benefitstogether. In this paper, we make progress in addressing the paucity of causal evidence by leverag-ing the phasing out of a large CIT exemption for export-oriented firms in Tunisia, duringa period in which all other benefits remained unchanged. Tunisia is a lower-middle incomecountry that has extensively relied on special regimes, the most important of which is theso-calledoffshore regime. This entails radically different institutions and rules for firmsthat export the majority of their sales.Until 2013, these firms were subject to a zeroCIT rate on their profits, whereasonshorefirms (i.e. all other firms outside the regime)faced a 30 percent CIT rate. This was the largest tax exemption scheme in Tunisia inthe past decades.1 Our identification leverages a large, arguably unanticipated policy shock. After almosta decade-long process to reduce the tax disparities between the two regimes, the CIT rate for offshores was raised to 10%, while the rate for onshore firms was reduced to 25%.