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Social Costs of Taxing Profit

Research using confidential tax return data 

All taxes impose costs over and above the revenue collected. Some are the direct costs of collection.  But others stem from the ways in which taxes distort economic behaviour – e.g. due to the foregone benefits of higher investment or employment. Newly available information on the tax returns of all UK companies has provided the opportunity to estimate the size of these costs for the first time.  

Research summary

The approach used for measuring the social cost of taxes on profit depends on how far the taxable income of companies responds to differences in the tax rate – for any reason, including lower investment, less effort or even greater avoidance.  In principle, this can be estimated by examining bunching in the distribution of taxable income when the tax rate changes.

Crucially, this approach requires detailed information on the taxable income of companies. This has recently been made available in a new Datalab created by HM Revenue and Customs (HMRC), which contains all UK corporation tax returns (anonymised) between 2001 and 2008 – around 1 million tax returns per year. By merging these tax returns with accounting data, we can also analyse the extent to which taxes affect the form of income (salary or profit) chosen by owners of small companies.

We find substantial social costs of taxes on corporate profit, which may be as high as 29% of the revenue raised.

Research published

Read the research article in American Economic Journal: Economic Policy, May 2014.

Media mentions

'Mining Leviathan: Surprising findings from a new stash of government tax data' The Economist


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Oxford Saïd authors

Michael Devereux, Professor of Business Taxation

Li Liu, Research Fellow


Other authors

Simon Loretz, University of Bayreuth