The Effect of Corporate Tax Cut on Capital Investment: An Empirical Study

From 2005 to 2006, Ghana reduced its corporate tax rate from 32.5 to 25 percent. The study uses both firm financial data as well as micro-economic data to examine how the cut in corporate tax rate affected firm capital investment in the country. The sampled consist of all non-financial firms on the Ghana Stock Exchange (GSE) between 2003 and 2017 with complete financial records. The result of the analysis shows a significant surge in firms’ capital investment in the periods after the tax rate reduction. In a sensitivity test, we also found an inverse relationship between firm-level tax rate and capital investment. The findings support the argument that a reduction in corporate tax rate could be used to promote investment for economic growth. The empirical evidence should, therefore, serve as a guide to policymakers in formulating tax policies that seek to stimulate firm growth. To the best of our knowledge, this is the first study that employed both financial and microeconomic data to examine the effect of Ghana's tax cut in 2005/2006 on corporate capital investment. It is also one of the few papers that examines the practical implication of tax reform from the respective of a developing country.