What are the effects of business behaviour on social welfare?
The Centre’s second broad research question concerns the consequences for economic and social welfare of business taxes. This includes the consequences of the behavioural effects which such taxes may induce, which results in some projects are not being directly concerned with tax, but rather examining the impact of business activity on social welfare. Identifying the social costs of distortions due to taxation is central for designing optimal tax policy.
Research addresses three main questions: the relationship between corporation tax rates and revenues; the effective incidence of business taxes; and the relationship between domestic and foreign economic activity.
1. What is the relationship between corporation tax rates and revenues?
A central, and largely unanswered, question is what has determined the pattern of receipts of taxes on corporate income. Over the last two decades across many countries, corporation tax rates have fallen, but tax revenues have been relatively stable and even increased. A small research literature has tried to address this issue, examining cross-country aggregate data, rates of incorporation and the allocation of profit within a country.
Our main contribution is to analyse microeconomic data sources from accounting data and confidential UK tax return data. We analyse tax returns to identify the main reasons why aggregate taxable income has risen over time. Specific projects address the following questions. Has the distribution of taxable income changed, with more reliance on a few very large companies? Have rates of profit been rising for the large mass of companies? Has less use been made of allowances and reliefs? Is increasing openness correlated with declining tax revenues?
Individual projects
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Internationalization and business tax revenue – evidence from Germany
Johannes Becker & Clemens Fuest
forthcoming in: International Tax and Public Finance
The ongoing internationalization of business activity fuels concerns that governments may lose their ability to tax business income. By using data on sixteen German states from 1970 to 2005, we estimate the impact of internationalization, measured by trade volumes and stocks of foreign direct investment, on business tax revenues. We control for the impact of internationalization on business profits. Surprisingly, we find strong and robust evidence for a positive impact of internationalization on tax revenue. An increase in the internationalization indicator of ten percent increases tax revenue by over three percent. This counter-intuitive result may be explained by a higher tax avoidance activity of purely national firms or by legal provisions in the tax law which can be used as tax loopholes in the case of domestic transactions as opposed to cross-border transactions. |
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Developments in the taxation of corporate profit in the OECD since 1965: rates, bases and revenues
Michael Devereux
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The effects of EU Formula Apportionment on corporate tax revenues
Michael P Devereux, Simon Loretz
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Who pays corporation tax in the United Kingdom?
Michael Devereux, Simon Loretz
We estimate the corporate tax payments in the United Kingdom using only publicly available data. In doing so, we discover two major shortcomings in both the existing statistics and in the available data. First the available statistics provided by the HMRC are based on unconsolidated accounts. This tends to underestimate the concentration of the tax payments and therefore can be misleading. The second problem is the fact that the statistics are mostly based on the current tax charge of firms with an accounting year end in the fiscal year. The use of this method, rather than basing the statistics on the actual tax payments implies a timing problem which can be exacerbated in times where the profit situation is changing fast. |
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The relationship between accounting profit and taxable profit: evidence from UK tax return data
Michael Devereux, Simon Loretz
We use confidential tax return data, made available by the HMRC, to analyse the corporation tax payments of UK companies. We aim to detail differences between measures of accounting profit and taxable profit. |
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Corporation Tax in the OECD in a Wider Context
Simon Loretz
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Tax Haven Activities and the Tax Liabilities of Multinational Groups
Giorgia Maffini
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2. What is the effective incidence of taxes on business?
A key issue in the design of any business tax is which individuals end up bearing the tax burden: that is, how is the tax burden shared between the owners of the business, the employees, the suppliers and the customers? As with most of the research programme, we aim to address this question using microeconomic data.
Individual projects
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The direct incidence of corporate income tax on wages
Wiji Arulampalam, Michael P Devereux, Giorgia Maffini
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Taxing multinationals under union wage bargaining
Nadine Riedel
This paper investigates corporate taxation under separate accounting (SA) and formula apportionment (FA) in a model with union wage bargaining and multinational firms. Under SA, we find that increases in the corporate tax rate raise the wage level of domestic workers while they lower the remuneration of foreign workers. The main insight emerging from a tax competition game is that the endogeneous wage level gives rise to an ambiguous fiscal externality which may dampen the race-to-the-bottom in corporate tax rates. A switch to a tax system with FA principles reverses the impact of corporate taxes on bargained wages. While increases in the corporate tax rate reduce domestic wages, they raise the wage level of foreign workers. In a tax competition game, the endogeneous wage level gives rise to a positive fiscal externality which enforces the race-to-the-bottom in corporate tax rates. |
3. What are the effects of outbound investment?
A much-debated policy question is how governments should tax foreign-source income since how they do so will affect the degree of outbound investment. So an important issue for tax policy is the social cost of outbound investment. Does outbound investment reduce domestic investment, and hence also reduce the demand for labour, resulting in higher unemployment and lower wages? Or does outbound investment facilitate efficiency improvements, resulting increased investment and employment at home? Effects may differ according to the type and location of outbound investment, and may differ for different groups of domestic workers. If outward investment takes advantage of low wages abroad and substitutes domestic for foreign production, then low- and high-skilled workers may be affected asymmetrically, potentially leading to greater domestic inequalities of income and wealth.
We use AFDI data, available at the Office for National Statistics, to explore these issues.
Individual projects