Impact of Corporate Income Tax on Economic Growth in Zambia: An Instrumental Variable Approach

Abstract

Purpose: The study examined the impact of corporate income tax on economic growth in Zambia using the Instrumental Variable (IV) approach. Materials and Methods: The study utilized a quantitative research approach, employing time series data for the period 1994-2023. The data was compiled from various sources. The top statutory corporate and personal income tax rates were obtained from the World Tax Database while the other variables namely, FDI, population growth, education and trade were obtained from the World Development Indicators, compiled by the World Bank. The study employed both OLS and 2SLS using IV Methods to address endogeneity concerns. Findings: The empirical findings show a statistically significant negative impact of CIT on economic growth in Zambia. OLS estimates suggest that higher CIT rates are associated with slower GDP per capita growth, though the magnitude of this effect is relatively small. However, the IV approach yields larger negative coefficients, reinforcing the argument that CIT exerts a substantial adverse effect on economic growth when endogeneity is accounted for. Specifically, the IV results indicate that a 10 percent reduction in the corporate tax rate causes an increase in GDP per capita growth by approximately 1.19 to 1.34 percent. Unique Contribution to Theory, Practice and Policy: The negative impact of CIT on economic growth calls for policymakers to come up with an optimal taxation structure in which taxation of income is not excessive. This is attributed to the effects of a high CIT rate which discourages reinvestment by reducing after-tax profits, limiting the capacity of firms to expand, innovate and/or create jobs. In turn, this dampens productivity and slows overall economic growth. The study recommends that policymakers should consider lowering the CIT rate to encourage business expansion, attract investment and boost job creation.