Corporate Tax Decrease and Firm Value

This paper analyses the effects for companies of this major trend observed over the past two or three decades: the steady decline in corporate tax rates. Contrary to current opinion, lowering the rate of corporate tax does not necessarily favour shareholders; the tax saving is far from remaining in companies' balance sheets. The reason is that the corporate tax has the characteristics of a largely neutral tax: its level has a relatively low impact on the return on capital and the behavior of firms in terms of output and employment. How else could we make sense of the big economies having prospered in the post-war period with tax rates of around or above 50 %? The article shows that the increasing openness of borders and capital markets is a major game-changer, where the corporate tax loses much of its neutrality. Lowering the tax rate creates a one-off benefit for companies in the country that triggers the reduction, before the tax regains its (quasi) neutrality under the effect of the strategic response of the other countries. This is fueling the race to lower tax rates, ultimately futile, but very destabilizing for public finances.