Can keeping lower corporate income tax rate in Serbia be justified by the tax competition argument?

Kelić, Vasko (2022) Can keeping lower corporate income tax rate in Serbia be justified by the tax competition argument? In: Book of Abstracts: 3rd International Interdepartmental Conference “Shaping Post-COVID World – Challenges for Economic Theory and Policy”. Ekonomski fakultet Univerziteta u Beogradu., Beograd, p. 40. ISBN 978-86-403-1749-8

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Abstract

This paper aims to offer a new, more exhaustive way of resolving disputes that were manifested in frequent changes in the corporate income tax rate (CITR) in Ser- bia during the last twenty years. Taking this into account, the discussion in the paper will start with one of the main arguments in favor of keeping a lower CITR: the tax competition argument. This argument holds that a lower CITR stimulates the inflow of new capital and prevents the outflow of existing capital. Numerous studies that support this argu- ment will be mentioned. The tax competition argument will then be confronted with two counterarguments. The first counterargu- ment will be based on several studies, two of which include Serbia, that show a lack of sta- tistically significant negative effects of higher CITR on foreign capital inflows. The second counterargument will point out that addi- tional government revenue accrued from the increase in CITR could be used to benefit society (e.g., by enhancing the judicial sys- tem and public schooling). It will also argue that the benefit of such uses outstrips their opportunity costs. To incorporate arguments from both sides, it will be maintained that a few percentage increases in CITR could help in obtaining social benefits without signif- icant negative effects on capital flow. It will be added that a higher increase in CITR could, however, lead to adverse effects and should thus be accompanied by additional tax incentives. To resolve the dispute, certain aspects of the standard cost-benefit analysis will be utilized.

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