Taxation and capital formation: non-linear effects and asymmetry between developing and developed countries

Abstract

This study endeavours to shed light on the threshold for the association between corporate income taxation and capital accumulation. In particular, the study focuses on the difference between developing countries and developed countries. The new econometric framework of the dynamic panel threshold model developed by Seo and Shin (2016) and Seo et al. (2019) is employed for a global sample of 72 countries, consisting of 35 developed and 37 developing countries over the 1994–2016 period. The threshold effects of corporate income taxation on capital accumulation are documented for both the short- and long-run. Interestingly, an inverted U-shaped impact of corporate income taxation on capital accumulation is found in developing countries. In contrast, a U-shaped curve exists for developed countries. The results are checked for robustness by different measures of capital accumulation and corporate income taxation. The results imply a need to consider different tax designs for developed and developing countries.