The OECD has highlighted how corporate income tax rates, compliance costs, and tax relief provisions influence business entry, investment, and competition. Its latest reports identify ways to simplify tax systems, ease financial constraints on smaller firms, and promote a more dynamic and competitive business environment.

The OECD published its Secretary-General Tax Report to G20 Finance Ministers and Central Bank Governors, prepared for their meeting under the United States presidency on 15 October 2026. The report updates the OECD’s tax work from April 2026, focusing on how corporate income tax policies can promote business dynamism and economic growth. It examines the effects of tax rates, compliance costs, loss-offset provisions, financing constraints, and competitive distortions on businesses, while identifying ways to create a more dynamic and competitive business environment.

The OECD has also published a separate report, Enhancing Corporate Tax Systems to Support Business Dynamism, which examines this topic in greater detail.

How corporate tax systems shape business growth and competition

Business dynamism—the continuous cycle of firms entering markets, expanding, contracting, and exiting—underpins productivity growth, innovation, and job creation. Over the past two decades, this dynamism has weakened across many advanced economies, with fewer new firms entering, slower job movement between companies, and a shrinking share of employment in young firms. Emerging and developing economies show similar patterns.

The tax system’s multiple effects on business entry and exit

Corporate income tax (CIT) rates influence whether new firms start operations. Higher CIT rates reduce expected after-tax profits, which can discourage entry, though the strength of this effect varies depending on how tax rules are designed. By contrast, firm exit responds more weakly to tax rates; market forces and structural conditions drive exit decisions more powerfully than taxation does.

Smaller, younger, and cash-strapped firms react more strongly to tax policy than established companies. A large corporation can absorb higher tax burdens differently than a startup with limited resources.

Cash flow and the survival of new ventures

Small and young firms face tight constraints on external financing and rely heavily on internal cash to fund operations and growth. Tax rules that squeeze cash flow or delay access to tax relief hit these firms harder than others.

Policies such as loss carryforwards, refundable credits, and accelerated depreciation allowances help firms manage cash constraints and encourage risk-taking. These provisions offer better value for growth support than many alternative tax policies. However, they carry fiscal costs, administrative complexity, and potential for abuse. Poorly designed programs can create perverse incentives, where firms intentionally stay small to preserve tax benefits.

Complexity creates hidden barriers

Tax complexity increases compliance costs and uncertainty. Small and young firms suffer most because they lack the staff and resources that larger firms can devote to tax administration. They also cannot achieve economies of scale in compliance.

Excessive complexity reduces how often firms use available tax incentives and raises the cost of expanding across borders. Simpler, more predictable tax rules—especially those that align internationally—strengthen business dynamism.

The competitive playing field

Large and multinational firms sometimes exploit tax planning strategies unavailable to smaller competitors, potentially shifting the balance of power away from new entrants. International tax reforms that create level competition between different firm types support dynamism. Yet new burdens on multinational enterprises—higher audit rates, extra reporting demands, international tax friction—can reduce the benefits these firms bring when entering new markets and spreading productivity improvements.

What matters beyond tax

Tax policy alone cannot fix declining dynamism. Competition rules, insolvency laws, access to financing, innovation infrastructure, technology diffusion, and labour market flexibility all matter equally. These factors work together; none substitutes for the others.

Remaining questions

The OECD identified gaps in current knowledge. More evidence is needed on how tax policy affects firm exit, growth trajectories, and competitive structure. Future research should measure tax effects across the entire life cycle of firms, account for differences between firm types, and clarify how specific tax provisions shape entrepreneurship and market dynamics. The international dimensions of business dynamism—the role of multinationals, cross-border expansion, and productivity spillovers—also warrant further investigation.