Brownbag Seminar: Lucía Contreas

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Title: Less Simple, Less Distortionary? Evidence from Costa Rica’s Corporate Tax Reform Authors: Lucía Contreas and Jonathan Garita Abstract: This paper studies how firms respond to a less distortionary but less simple tax schedule in a developing economy. We do so in the context of Costa Rica’s 2020 corporate income tax reform, which replaced a simple but highly distortionary notched schedule with a less simple and more efficient kinked one. Notched schedules are relatively easy to comply with and administer, which may explain why they are common in these settings, but their design makes liability jump at cutoffs, creating strong incentives to stay below them. Kinked schedules weaken these incentives, but they are less simple, which can lead taxpayers to misperceive the relevant incentives. Using 2016–2024 administrative tax returns and a difference-in-differences design that exploits rich variation in marginal and average tax rates across firms, we find no such misperception. Reported profits responded to the relevant changes in marginal tax rates, but not to changes in average rates, unlike what has been documented for individuals. In contrast to the asymmetries documented for other taxes such as VAT, reported profits were equally responsive to corporate tax cuts and increases, with elasticities of about 3.1–3.2, which can inform future tax policy. Overall, given these responses, we argue that less simple, and more economically efficient tax designs, should be considered in developing economies. Coffee and sandwiches will be provided. We hope to see many of you there.