Alessandro Toppeta
Jason Sockin
Todd Schoellman
Paolo Martellini
UCL Policy Lab
Natalia Ramondo
Javier Cravino
Vanessa Alviarez
Natalia Ramondo
Javier Cravino
Vanessa Alviarez
Hugo Reis
Pedro Carneiro
Raul Santaeulalia-Llopis
Diego Restuccia
Chaoran Chen
Brad J. Hershbein
Claudia Macaluso
Chen Yeh
Xuan Tam
Xin Tang
Marina M. Tavares
Adrian Peralta-Alva
Carlos Carillo-Tudela
Felix Koenig
Joze Sambt
Ronald Lee
James Sefton
David McCarthy
Bledi Taska
Carter Braxton
Alp Simsek
Plamen T. Nenov
Gabriel Chodorow-Reich
Virgiliu Midrigan
Corina Boar
Sauro Mocetti
Guglielmo Barone
Steven J. Davis
Nicholas Bloom
José María Barrero
Thomas Sampson
Adrien Matray
Natalie Bau
Darryl Koehler
Laurence J. Kotlikoff
Alan J. Auerbach
Irina Popova
Alexander Ludwig
Dirk Krueger
Nicola Fuchs-Schündeln
Taylor Jaworski
Walker Hanlon
Ludo Visschers
Carlos Carillo-Tudela
Henrik Kleven
Kristian Jakobsen
Katrine Marie Jakobsen
Alessandro Guarnieri
Tanguy van Ypersele
Fabien Petit
Cecilia García-Peñalosa
Yonatan Berman
Nina Weber
Julian Limberg
David Hope
Pedro Tremacoldi-Rossi
Tatiana Mocanu
Marco Ranaldi
Silvia Vannutelli
Raymond Fisman
John Voorheis
Reed Walker
Janet Currie
Roel Dom
Marcos Vera-Hernández
Emla Fitzsimons
José V. Rodríguez Mora
Tomasa Rodrigo
Álvaro Ortiz
Stephen Hansen
Vasco Carvalho
Gergely Buda
Gabriel Zucman
Anders Jensen
Matthew Fisher-Post
José-Alberto Guerra
Myra Mohnen
Christopher Timmins
Ignacio Sarmiento-Barbieri
Peter Christensen
Linda Wu
Gaurav Khatri
Julián Costas-Fernández
Eleonora Patacchini
Jorgen Harris
Marco Battaglini
Ricardo Fernholz
Alberto Bisin
Jess Benhabib

Effective tax rates and firm size

What is this research about and why did you do it?

There is a general perception that firms pay less tax than the statutory tax rates would suggest, even after accounting for profit shifting and evasion. Indeed, tax incentives such as credits, income exemptions and reduced rates can create a wedge between statutory and effective tax rates. We examine how tax incentives lower effective tax rates and how they vary with firm size. This is important because tax incentives generate a government revenue loss, can distort firms’ production, and may exacerbate inequality. We also use our estimates of effective tax rates to assess the potential impact of a Global Minimum Tax.

How did you answer this question?

We construct effective tax rates (ETRs) at the firm level, using full-population corporate tax records for 13 countries with varied income levels and population sizes, in Africa (Ethiopia, Eswatini, Rwanda, Senegal, Uganda), Latin America (Costa Rica, Dominican Republic, Ecuador, Guatemala, Honduras, and Mexico), and Eastern Europe (Albania and Montenegro). Our ETR measure is defined in a consistent way across countries, as a firm’s corporate tax liability divided by its net profits (total revenue minus standard production and financing costs). Differences in ETRs across firms are hence due to policy choices (tax incentives) and not due to differences in firms’ profitability.

What did you find?

When plotting the ETR by firm size (revenue) quantiles, we observe an inverted U-shape pattern. The ETR increases with firm size until about the 90th percentile and then falls for the largest firms. A firm in the top 1% of size faces an ETR that is three percentage points lower than a firm in the top 10%. Small firms face lower ETRs than mid-sized firms due to reduced statutory tax rates and a higher propensity to register losses. The drop in the ETR at the top is due to tax credits, which are disproportionately used by large firms.

This figure plots the effective tax rate (ETR) by firm size (revenue) quantiles, averaged across the 13 countries in our data. For each quantile bin, we first average the ETR across firms in each country, and then average across countries to give equal weight to each country. The quantiles correspond to percentiles between the 1st and 89th percentile (white area), and to 0.2% bins between the 99th and 100th percentiles (grey shaded area). The orange fitted line is based on a cubic smoothing spline.

What implications does this have for the research on wealth concentration or economic inequality?

The variation in ETRs with firm size is large and systematic, and hence likely to distort to distort firm choices and affect aggregate output. The drop in ETRs among the largest firms also implies a substantial scope for a global minimum tax to raise revenue. In the median country in our sample, 30% of the biggest 1% of firms pay an ETR below 15%. Lifting their ETR to 15% would increase revenue by 27%.

What are the next steps in your agenda?

More work is needed to examine the welfare impact of the ETR-firm-size pattern we document, taking into account potential benefits of tax incentives for investment and innovation. Another open question is why large firms benefit disproportionately from tax incentives.

Citation and related resources

This paper can be cited as follows: Bachas, P., Brockmeyer, A., Dom, R., and Semelet, C. (2023). "Effective Tax Rate and Firm Size." World Bank Policy Research Working Paper 10312. This working paper is also available from the CEPR website (login required).

Related resources:

Earlier work is available which uses the same database of full-population corporate income tax panel across countries:

About the authors


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