1. Nita Rudra, Georgetown University
A Democratic Dilemma? The Challenges of Taxing Firms in a Globalizing Economy
Nita Rudra, Georgetown University
Ida Bastiaens, Fordham University
International Political Economy Society
Austin, Texas 2017

2. A revenue shock is occurring in liberalizing developing countries

3. Could taxing large corporations be the solution?
Easy to locate
Subject to public reporting requirements
Corporate income already 2/3 of income tax revenue collected
Advised by IFIs (UNCTAD 2015; Oxfam 2016; Lagarde 2016; World Bank 2016b)

4. Argument in brief
We argue that less productive firms will resist tax reform post-liberalization
And, democracies, in particular, will struggle to increase corporate tax rates and revenues post-liberalization because they are most susceptible to firm lobbying
We propose that democracies are experiencing a relatively rapid decline in corporate taxation rates and revenues in response to demands from a key interest group: less productive firms.
This is a distinct departure from current explanations, which contend that large, more productive exporting firms are the main lobbyists for declining corporate taxes in a global economy.
The use of coercion and harsh punitive measures for tax violations are added tools that authoritarian regimes threaten to employ to solicit corporate tax compliance.

5. Corporate tax rates (CTR) are declining in developing countries
Assumption is that large, exporting firms are pressuring for these lower CTR. (Dur 2007; Yasar 2013; Krishna and Mitra 2005)
This is problematic: large firms have extensive options for tax avoidance and paying taxes is relatively less costly for these productive firms, esp if it results in greater public good provision (see Helpman et al 2004; Melitz 2003; Benassy-Quere, Fontagne, and Lahreche-Revil 2005)

6. Large, less productive firms are pressuring gov’t for lower tax rates & tax concessions
Less productive firms are struggling to compete in local and global markets
These large firms play a critical role in creating employment and are well-positioned to lobby gov’t (Schamis 1999; Kurtz and Brooks 2008; Zhou 2008)
‘Losers’ receive more gov’t compensation (Baldwin and Robert- Nicoud 2007; Kurtz and Brooks 2008; Rodrik 1997; Adsera and Boix 2002; Walter 2010)
Less productive firms will have most success in:
Democracies  Particularly susceptible to firm lobbying (Weymouth 2012)
Democracies with ISI legacies  Previously protected firms have political connections (Kurtz and Brooks 2008)

7. H1: In the liberalizing environment, businesses are more successful resisting taxes in democracies than they are in authoritarian regimes.
H2: The decline in corporate taxes will be more acute in democracies with strong ISI legacies.

8. Empirics: Democracies experiencing a larger decline in CTR upon liberalizing
Fixed effects regression of trade tax revenue*democracy on CTR
Baseline Controls: IMF, investment profile, portfolio inflows, country and year dummies
Finding: In democracies, an increase in openness is associated with declines in CTR

9. Empirics: Democracies are also experiencing a decline in income tax revenue upon liberalizing
Fixed effects regression of trade tax revenue*democracy on income tax revenue
Controls: IMF, GDPpc, Debt, Kaopen, Pop, Aid, Growth, Fuel, IMF country and year dummies
Finding: In democracies, an increase in openness is associated with declines in income tax revenue

10. Empirics: Democratic governments are responding to less productive firms
Less productive firms receive less tax inspections
Probit estimation: democracy*exports on tax inspections
Controls: GDP per capita, bureaucratic quality, firm size, firm sales, region and year dummies
Finding: In democracies, firms with less exports are less likely to have a tax inspection

11. Empirics: ISI-legacy less productive firms are most effective in lobbying democracies for a favorable tax bargain
Difference in difference model:

12. Case example: Herbal Products in India
Pre-liberalization, India heavily protected Ayurvedic and other traditional medicines (Shaikh 2015, Perlitz 2008)
‘Ayurvedic Proprietary Medicine’ products had lower levies (8 percent) va. similar products without this label (20 percent).
Now, increased competition from foreign producers and more productive alternative medicine and herbal product firms such as Dabur and Himalaya.
Ayurvedic domestic sales and exports have slowed down
Ayurvedic firms are resisting any new taxes and Indian gov’t is responding
Ayurvedic firm Patanjali Ayurved’s chief executive officer recently demanded that the government “keep ayurveda at the lower end of the tax rate” in the recent tax reform negotiations
State and central government officials have “gone out of the way” to offer tax concessions to Ayurvedic industrial firms in order to “promote the traditional system of medicine”
corporate income tax concessions for herbal drug investments in the 2003 national budget
100 percent corporate tax exemption for five years in Himachal Pradesh

13. Implications… Globalizing democracies are in a bind
Lower CTR are not associated with increased corporate tax revenues
Tradeoff: Respond to corporate demands to be competitive vs. Raise much needed revenue