The economies of low corporate income tax

Countries across the world are in a competition with regard to having a low corporate income tax or tax on business's income. Bangladesh's rate in this respect falls in the middle. That is, some countries are having higher corporate income tax rate than Bangladesh while some others have less. But a least developed country (LDC) like Bangladesh has more problems with a higher corporate income tax rate than others, specially compared to the countries where investors feel more comfortable with their investments and also where most of the shareholders or the owners of the corporations live. A high tax rate on corporation's income leaves less for the owners or the equity holders. It also takes away the money from the corporation's account and gives the same to the government which it spends inefficiently in most cases.
If an unit of income is spent by the corporation  more efficiently, then there is no justification of handing over the same to the government, just because it needs it.
Many countries in the world have already reduced their corporate income tax drastically and others are having a serious look at it. Why are the countries in competition in reducing the corporate income tax? There are two reasons; one, a lower tax leaves more money with the corporation for reinvestment and two, even if the after-tax profit or net profit is distributed among equity holders in the form of dividends, the money again goes back to investment. It is a recognised fact that marginal rate of savings from the dividend income is much higher than that from salary or wage incomes. Most of the investments that are taking place around the world are being made by the corporations from their retained earnings. Secondly, the problem with a high corporate income tax is that it drives the corporations to hide their actual income. The hidden income is either transferred to a low tax country or distributed among the equity holders in a way that remains hidden from the sight of the tax authority. Higher corporate income tax rates not necessarily guarantee a high tax revenue for the government, specially in a country like Bangladesh where corruption is rampant and where audit report with regard to fictitious income of the corporation is easily available.
Money and capital do not have any geographical boundary. They flow where they get better returns.  Return is one of the elements for money's flow across the boundaries. The other elements are security of income and investment, an acceptable mechanism of dispute settlement, and feeling at ease in doing business. In Bangladesh, the returns on business are high, but the other factors for keeping money at home are not there to an acceptable level. Bangladesh can compensate the absence of these other factors by giving a low tax rate facility against the business's income. There are territories which are called 'off-shore' centres where corporate income tax rate or tax on business's income is almost zero.
Income earned in one place like Bangladesh has a tendency to flow to other countries with favourable tax rate. This is more true in case of incomes earned by the multinational corporations. Multinationals' global shareholders are the same people. It does not matter whether they receive the dividend incomes from Bangladesh or not. What matters to them is the higher returns on their investment. Money and income are transferred to the low-tax countries or territories through transfer pricing, a mechanism used for the purpose through buying and selling of inputs by the corporations. The world could not yet stop this type of money transfer. It is happening in the developed countries also, but is frequent in countries like Bangladesh to the 'safe havens' beyond the national borders. Bangladesh could not effectively put into operation the newly-enacted law against transfer pricing. The better option for a country like Bangladesh is to go for a low tax rate on corporation's income and try to provide safety and security to its investments.
Only a low tax on business's income can prevent the businesses from stealing Bangladesh's income.
Tax structure should prompt the businesses to declare more dividends for their shareholders. Only then the tax authority will also receive more tax.
The writer is a Professor of Economics, University of Dhaka,  abuahmedecon@yahoo.com