A simpler tax regime leads to more corporate investment

One of Jesse van der Geest’s studies is about the cost of tax compliance. Filing tax returns takes a lot of time and resources. This study shows that if businesses have to spend a lot of time and resources on tax compliance, they tend to invest less in production resources.

Why does a simpler tax regime lead to more corporate investment?

“If you make the tax regime simpler, companies can save on time and resources. Each euro or each hour that they save can be used for different purposes, corporate investment being one of them.”

How should the tax return be made easier?

“There are two ways in which simplification could reduce costs. One option is making the tax rules simpler, for instance, by reducing the number of rules, or by making the rules easier to comply with. Even though there is a world to be gained here in theory, the practice of simplifying tax rules is another thing, because politicians often use the tax system for policy purposes. 

What viable alternatives are available? 

“One alternative would be simplifying the tax payment process. The Netherlands is an international leader in this context but in developing countries, for instance, the administrative costs of filing tax returns are relatively high.

Since this is low-hanging fruit for policy makers, I have looked at ways to simplify the administrative process of filing tax returns. My research has shown that this leads to more corporate investment. Companies partly use the costs they save on tax compliance to invest in production resources. This is good for the economy as corporate investment contributes to economic growth.”

Why are simpler tax rules good for the economy? 

“Tax compliance is important for society because the government would have no money without taxes. However, from an economic perspective, the resources necessary for tax compliance are a waste because these resources do not create any economic value. Corporate investment does create economic value and constitutes an important factor of economic growth. Even though some costs will have to be incurred to comply with tax law, there has been much criticism in the public debate about the level of these costs. Given these high costs, and my findings that companies comply to the detriment of corporate investment, it is important that politicians takes the cost of complying with the tax regime into account if they want to make any changes.”