Ramifications of Tax Reductions

This is in response to the article “Corporate Tax Reductions: Weak Analytical Foundation” by J Dennis Rajakumar and S L Shetty (EPW, 7 March 2020). Its aim is to investigate the “nature of corporate tax reform and its potential to achieve the objectives of promoting growth and investment” (p 62). The article is timely in the context of economic growth slowdown in major
sectors, including the rural agrarian crisis. The main research question that is explored is whether the reduction in corporate taxes really promotes a conducive environment for the increased investments in the domestic market. In simple terms, it explored the fi scal feasibility of the reduction in corporate taxes and its implications on the growth stimulus. With the help of time-series data, the authors fi nd that the “vast reduction in corporate taxes does not possess the potential to produce the desired outcome in so far as reviving corporate investment is concerned” (p 65). The fi ndings are policy-relevant and serve as an eyeopener for the government to restructure taxation priorities.

The authors have rendered justice to the title with the help of data and its subsequent critical analysis to arrive at certain crucial implications for fi scal policy with emphasis on the revenue base of the government. It is observed that the reduction of corporate taxes has skewed the revenue receipts of the government from the corporate sector, which is a revealing aspect. This happens in
two ways: (i) The reduction in the share of percentage of corporate tax in direct taxes, and (ii) the benefi ts of tax reduction are accrued by the non-manufacturing companies. One of the critical fi ndings is that “the fi nancial burden associated with corporate tax rate reduction is falling on the contraction in government tax revenue, and simultaneously, the relative burden of direct taxes is falling on individuals” (p 64).