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Behavioural responses to corporate profit taxation

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  • John Creedy

    ()
    (University of Melbourne)

  • Norman Gemmell

    ()
    (University of Nottingham)

Abstract

This paper examines behavioural responses by companies to changes in profit taxation in their home country. The elasticity of tax revenue with respect to changes in the corporation tax rate are decomposed into a variety of responses. As well as distinguising real from profit-shifting responses, it is important to separate the responses of gross profits from those of deductions (such as claims for past or current losses) where these are endogenously related to gross profits declared at home. This endogeneous response can be expected to differ over the business cycle, which can be important for empirical estimates of aggregate behavioural responses especially, but not exclusively, during cyclical downturns. It is suggested that the revenue elasticity can be expected to be asymmetrical between periods of aboveand below-trend growth, arising from the asymmetric treatment of losses by the tax function.

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Bibliographic Info

Article provided by IEF in its journal Hacienda Pública Española/Revista de Economía Pública.

Volume (Year): 193 (2010)
Issue (Month): 2 (June)
Pages: 109-130

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Handle: RePEc:hpe:journl:y:2010:v:193:i:2:p:109-130

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Keywords: Corporation tax; profit shifting; revenue elasticity; tax asymmetries;

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References

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  1. Creedy, John & Gemmell, Norman, 2008. "Corporation tax buoyancy and revenue elasticity in the UK," Economic Modelling, Elsevier, vol. 25(1), pages 24-37, January.
  2. Huizinga, Harry & Laeven, Luc, 2007. "International Profit Shifting within European Multinationals," CEPR Discussion Papers 6048, C.E.P.R. Discussion Papers.
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  4. Bartelsman, Eric J & Beetsma, Roel, 2000. "Why Pay More? Corporate Tax Avoidance Through Transfer Pricing in OECD Countries," CEPR Discussion Papers 2543, C.E.P.R. Discussion Papers.
  5. Harry Grubert & Joel Slemrod, 1994. "The Effect of Taxes on Investment and Income Shifting to Puerto Rico," NBER Working Papers 4869, National Bureau of Economic Research, Inc.
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  7. Martin Feldstein & James R. Hines Jr. & R. Glenn Hubbard, 1995. "The Effects of Taxation on Multinational Corporations," NBER Books, National Bureau of Economic Research, Inc, number feld95-2.
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  16. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September.
  17. Michael Devereux & Rachel Griffith & Alexander Klemm, 2004. "How has the UK corporation tax raised so much revenue?," IFS Working Papers W04/04, Institute for Fiscal Studies.
  18. Feldstein, Martin, 1995. "Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Scholarly Articles 2766676, Harvard University Department of Economics.
  19. Devereux, Michael P, 1989. "Tax Asymmetries, the Cost of Capital and Investment: Some Evidence from United Kingdom Panel Data," Economic Journal, Royal Economic Society, vol. 99(395), pages 103-12, Supplemen.
  20. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 305-22, June.
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  22. Kimberly Clausing, 2007. "Corporate tax revenues in OECD countries," International Tax and Public Finance, Springer, vol. 14(2), pages 115-133, April.
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