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ETPF Research Main
ETPF Phase 1 The effects of international taxation on business
ETPF Phase 3 International tax and economic welfare
ETPF Research Phase 2
The welfare implications of international taxation and tax competition
1 Corporation tax is borne by workers, not shareholders
3 Corporation tax creates unemployment
4 Globalisation generates higher corporation tax revenues
5 Tax competition in income tax as well as corporation tax
1 Corporation tax is borne by workers, not shareholders
Economic
theory indicates that in an open economy, shareholders do not bear the burden of
corporation tax. Higher taxes
require higher pre-tax rates of return so that shareholders can earn the same
rate of profit after tax as they can in other countries.
Instead the tax burden must be passed on to the workforce and consumers.
This paper is one of the first studies to test this theory.
It does so using data from company financial accounts.
The results strongly support the theory.
In the short run, a £10 increase in the corporation tax liability
results in a fall in wage payments of just over £5.
In the long run, wage payments will fall by even more than £10.
Not only is the tax wholly borne by labour, but in addition the cost of
economic distortions created by the tax are also borne by labour.
The paper uses data on 23,000 companies, based in 10 countries, using data
between 1993 and 2003. It uses
sophisticated econometric techniques to analyse the relationship between wage
rates and tax liabilities, allowing for many other factors, including measures
of productivity, personal income taxes and employment protection legislation.
Research
Paper - The Incidence of Corporate Income Tax on Wages
by Wiji Arulampalam, Michael P. Devereux and Giorgia Maffini, Oxford
University Centre for Business Taxation
The
European Commission is currently pursuing a proposal to introduce a “common
consolidated corporate tax base” (CCCTB).
The proposal is that a company operating in more than one country within
the EU could declare only its EU-wide profit.
That profit would be allocated to individual member states on the basis
of a simple formula. Each member
state would tax its allocation at its own tax rate.
The details of the proposal are subject to ongoing discussions in
Brussels.
This research paper analyses the likely impact of introducing these proposals on
corporation tax revenues. It takes
existing measures of taxable income for individual companies, and calculates how
losses could be offset across countries within multinational groups, and also
how alternative allocation formulas would affect the overall distribution of
corporation tax liabilities.
If companies can choose whether to participate, they will generally only do so
if they pay lower taxes: which implies that overall tax revenues will fall.
Overall, EU tax revenues would fall by around 1%.
But there will be gainers and losers amongst the EU member states.
The UK would gain – irrespective of the allocation method used.
If companies are obliged to participate then EU-wide corporation tax revenues
would rise by 8%. But again, the UK
would do better than average. Depending
on the allocation method used, UK corporation tax revenues could increase by
over 20%.
Research
Paper - The effects of EU formula apportionment on corporate tax revenues
by Michael P. Devereux and Simon Loretz, Oxford University Centre for
Business Taxation
3 Corporation tax creates unemployment
A
study by three Dutch economists examines the effect of corporation tax, income
tax and VAT on the labour market in the EU.
They build a computer model of the economies of the 17 largest EU
countries which investigates in detail the impact of these taxes.
The central estimate of the effect of corporation tax is that a fall in
corporation tax rates of around 8 percentage points – equivalent to reducing
revenues by half of a percent of GDP – would increase employment by half a
percentage point. Taking account of
labour supply changes as well, the unemployment rate would fall by around a
quarter of a percentage point. There
is some variation in this effect between EU countries.
The current UK unemployment rate is around 5.5% - such a tax change would
imply a fall to around 5.25%.
But the effects of corporation tax are lower than the effects of income tax and
VAT. On average in the EU, an
equivalent fall in income tax would reduce unemployment by around 0.43
percentage points, and an equivalent fall in VAT would reduce unemployment by
around 0.37 percentage points.
Research
Paper - Corporation
tax policy and unemployment in Europe: an applied general equilibrium analysis
by Leon Bettendorf, Albert van der Horst and Ruud A. de Mooij,
Erasmus University Rotterdam
4 Globalisation generates higher corporation tax revenues
It
is commonly believed that globalisation introduces tax competition as countries
reduce tax rates to attract inward investment.
This is supported by evidence of falling corporation at rates in the EU
and elsewhere. But it is
contradicted by evidence from the same countries of high corporation tax
revenues. One reason for this
apparently contradictory evidence may be that globalisation also leads to
increased profit, which in turn generates higher corporation tax revenues,
offsetting the cuts in tax rates.
This project tests directly whether globalisation leads to higher or lower tax
revenues. Using data from Germany,
it finds that tax revenues are higher in jurisdictions which are more globalised
– measured by having more foreign direct investment and more trade.
Specifically, it finds that a 10 percentage point increase in an index of
a country’s globalisation raises corporation tax revenue by 4.4%.
Research
Paper - Internationalization
and Business Tax Revenue – evidence from Germany
by Johannes Becker and Clemens Fuest, University of Cologne
5 Tax competition in income tax as well as corporation tax
The academic
evidence for competition between countries in setting corporation tax rates is
well established. But until now, there have been no studies considering whether
there is competition in other taxes. The project tests the hypothesis that there
is also competition in attracting unincorporated businesses through income tax
rates.
Based on data from OECD countries over the last 10 years, the project finds
substantial evidence of tax competition in both income tax rates and corporation
tax rates.
Further, it finds that these taxes are substitutes for each other. If
corporation tax rates in other countries fall, a country will respond by
reducing its corporation tax rate and raising its income tax rate. If income tax
rates in other countries fall, a country will respond by reducing its income tax
rate and raising its corporation tax rate.
Research Paper -
Competition in corporate and personal income taxation
by Peter Egger, Michael Pfaffermayr and Hannes Winner, Universities
of Munich and Innsbruck
ETPF Research Main
ETPF Phase 1 The effects of international taxation on business
ETPF Phase 3 International tax and economic welfare
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