Impact of economic volatility on corporate income tax rate: the case of 20 Asian countries

Abstract

This paper examines the impact of economic volatility on the corporate income tax rate in the context of globalization and international taxation competition. The impact is analyzed by two models, direct and indirect effect model. The former investigates directly the relationship of corporate income tax rates and economic volatility in terms of real interest rate, exchange rate, and growth rate. The latter applies a system of equations to examine simultaneously the determinants of tax rate and tax base. The study finds out that economic volatility impacts negatively on corporate income tax rate and also negatively on foreign direct investment (FDI) inflows. Moreover, corporate income tax rate affects negatively and significantly on FDI inflows, meanwhile FDI inflows influence corporate income tax rate with positive and significant impact.