Cost of high corporate income tax

Corporate income tax is one of the major sources of income for governments worldwide. Once corporate income tax rates were much higher than what they are now. In fact, the world now sees a competition as to which government can reduce how much of this tax. The main reason behind a reduced corporate income tax is to have more investment in the economy through corporate sector and also to attract more fresh investment from abroad.
The corporate world decides to invest in an economy seeing a few things very closely. Of these, one important aspect is the tax regime in the country where it wants to take a stake. Corporate income tax rate is an important factor in investment decision. Capital flows to where it can earn better returns.
As the pace of globalisation gathered speed so did the movement of capital flows across the national boundaries of different countries. A country's tax structure is very important so that it can compete successfully against others in attracting foreign capital. Now-a-days there is a marginal difference between foreign capital and local capital.
Human beings find it harder to cross the geographic boundaries, but capital does not. When almost all countries of the world opened up their economies for foreign capital, the countries which still have barriers of one kind or another in the way of entry of foreign capital will lose foreign investment. It is true that local investment takes the lead and foreign investment just follows. But these two sources of capital work in tandem better where barriers to capital use and its entry are slashed significantly.
Another important aspect of a reduced corporate income tax is that after-tax income of the corporate world finds way more to investment than to consumption. Corporate entities or companies reinvest most of its surplus income for expanding business activities. Many economies did well economically by creating better conditions for reinvestment by the corporations. In fact, overtime more capital finds way to investment from the corporations' surplus or undistributed profits than capital from other sources.
Most corporations expand business from use of capital from within. How much capital will be used from within depends among other things also on the rate of corporate income tax. Even it was found when corporations distribute their incomes after taxes among the equity holders, the distributed incomes, which are also known as dividends, find way more to investment in the economy than incomes from other sources. It is said, income from dividend income is used less in consumption, but income from salaries and wages is used more in consumption. Then there is another kind of economics which says an individual is a better spender or user of his income than the government. This basic economics says, money should be left with the individual rather than taking away by taxation. Still almost in every country, the government is a big spender for education, healthcare, and social security. But when the government levies taxes at a very high rate for collecting the fund for its own big budget, the investment in the private sector in all probability will go down. Society is to decide whether more money should be made available to the government through high tax rate or more money should be left with individuals and corporations for more economic use in the economy.
In many countries, governments do the works which also the private sector can do. Naturally in these countries, tax rates are high. In many other economies, governments only do those works which normally the private sector does not do. In those economies, the government can do with less taxes. For example, many countries do not have any government-owned airlines, but in some others, governments do have those and even fly them with subsidies. Bangladesh is also doing the same business. Another example is, the Bangladesh government owns five-star hotels, whereas in many other countries governments do not own hotels. They leave the hotel-motel business to the private sector. The government in Bangladesh is also running many jute and spinning mills with subsidy, which comes from tax-payers' money.  
Though, Bangladesh is trying to have a competitive corporate tax rate, its tax rate is still higher compared to even the neighbouring countries. The lowest corporate income tax in Bangladesh is 27 per cent and the highest is 42.5 per cent. The lowest rate, 27 per cent, is charged on listed companies. Again, all listed companies with the stock exchange are not equally treated in respect of payment of the lowest tax rate of 27 per cent. Some companies, though listed, are paying 40 per cent. The example is the Grameenphone. Banking companies, though listed, are paying the highest corporate income taxes at 42.5 per cent. These companies' corporate income taxes are even higher than those for private or non-listed limited companies in other sectors.
Bangladesh should strive more to reduce the corporate income tax. It is a fallacy that the higher the tax rate, the greater the revenue collection for the government. Rather the opposite is true. Many companies, especially multinational ones, practise transfer pricing just to avoid tax payments in countries where this tax rate is high. These companies do not disclose full amount of their profits in countries where they operate simply because if they do so they will be paying more taxes.
The writer is Professor of Economics University of Dhaka,
email: abuahmedecon@yahoo.com