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Profit Taxation And The Elasticity Of The Corporate Income Tax Base: Evidence From German Corporate Tax Return Data

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  • Dwenger, Nadja
  • Steiner, Viktor

Abstract

This paper estimates the elasticity of corporate taxable income with respect to the average corporate tax rate. To control for the endogeneity of the tax rate, we use an instrumental variable approach, calculating the counterfactual average tax rate that a corporation would have faced in a particular period had there been no endogenous change in corporate profits. This counterfactual rate is derived from a microsimulation model based on tax return data. A statistically significant and relatively large point estimate of the tax base elasticity implies that a reduction in the statutory corporate tax rate would reduce corporate tax receipts less than proportionally.

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Bibliographic Info

Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 65 (2012)
Issue (Month): 1 (March)
Pages: 118-50

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Handle: RePEc:ntj:journl:v:65:y:2012:i:1:p:118-50

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References

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  1. Frank Fossen & Stefan Bach, 2008. "Reforming the German Local Business Tax - Lessons from an International Comparison and a Microsimulation Analysis," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, Mohr Siebeck, Tübingen, vol. 64(2), pages 245-272, June.
  2. Gumpert, Anna & Hines Jr., James R. & Schnitzer, Monika, 2012. "The use of tax havens in exemption regimes," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University 381, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. Cooper, Michael & Knittel, Matthew, 2006. "Partial Loss Refundability: How Are Corporate Tax Losses Used?," National Tax Journal, National Tax Association, National Tax Association, vol. 59(3), pages 651-63, September.
  4. Aleksandra Riedl & Silvia Rocha-Akis, 2007. "Testing the tax competition theory: How elastic are national tax bases in western Europe?," Department of Economics Working Papers, Vienna University of Economics, Department of Economics wuwp112, Vienna University of Economics, Department of Economics.
  5. Seth H. Giertz, 2010. "The Elasticity of Taxable Income during the 1990s: New Estimates and Sensitivity Analyses," Southern Economic Journal, Southern Economic Association, Southern Economic Association, vol. 77(2), pages 406-433, October.
  6. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, National Tax Association, vol. 52(n. 2), pages 305-22, June.
  7. Merrill, Peter R., 2010. "Corporate Tax Policy For The 21st Century," National Tax Journal, National Tax Association, National Tax Association, vol. 63(4), pages 623-33, December.
  8. Wojciech Kopczuk, 2004. "Tax bases, tax rates and the elasticity of reported income," Discussion Papers, Columbia University, Department of Economics 0304-15, Columbia University, Department of Economics.
  9. John Shea, 1996. "Instrument Relevance in Multivariate Linear Models: A Simple Measure," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0193, National Bureau of Economic Research, Inc.
  10. Nadja Dwenger & Viktor Steiner, 2009. "Financial Leverage and Corporate Taxation: Evidence from German Corporate Tax Return Data," Discussion Papers of DIW Berlin 855, DIW Berlin, German Institute for Economic Research.
  11. Gruber, Jon & Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, Elsevier, Elsevier, vol. 84(1), pages 1-32, April.
  12. Alan Auerbach, 2006. "Why have Corporate Tax Revenues Declined? Another Look," CESifo Working Paper Series, CESifo Group Munich 1785, CESifo Group Munich.
  13. Leslie G. Godfrey, 1999. "Instrument Relevance in Multivariate Linear Models," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 550-552, August.
  14. Martin Feldstein, 1995. "Tax Avoidance and the Deadweight Loss of the Income Tax," NBER Working Papers 5055, National Bureau of Economic Research, Inc.
  15. repec:aei:rpaper:25839 is not listed on IDEAS
  16. Kimberly Clausing, 2007. "Corporate tax revenues in OECD countries," International Tax and Public Finance, Springer, Springer, vol. 14(2), pages 115-133, April.
  17. Clausing, Kimberly A., 2009. "Multinational Firm Tax Avoidance and Tax Policy," National Tax Journal, National Tax Association, National Tax Association, vol. 62(4), pages 703-25, December.
  18. Michael P. Devereux, 2008. "Business taxation in a globalized world," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 24(4), pages 625-638, winter.
  19. Stefan Bach & Nadja Dwenger, 2007. "Unternehmensbesteuerung: trotz hoher Steuersätze mäßiges Aufkommen," DIW Wochenbericht, DIW Berlin, German Institute for Economic Research, vol. 74(5), pages 57-65.
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Cited by:
  1. Liu, Li & Altshuler, Rosanne, 2013. "Measuring The Burden Of The Corporate Income Tax Under Imperfect Competition," National Tax Journal, National Tax Association, National Tax Association, vol. 66(1), pages 215-37, March.
  2. Dwenger, Nadja & Steiner, Viktor, 2009. "Financial leverage and corporate taxation: Evidence from German corporate tax return data," arqus Discussion Papers in Quantitative Tax Research, arqus - Arbeitskreis Quantitative Steuerlehre 61, arqus - Arbeitskreis Quantitative Steuerlehre.
  3. Leoš Vítek, 2013. "Corporate Income Taxation and the Corporate Tax Base in the Czech Republic," Český finanční a účetní časopis, University of Economics, Prague, University of Economics, Prague, vol. 2013(2).
  4. Enrique G. Mendoza & Linda L. Tesar & Jing Zhang, 2014. "Saving Europe?: The Unpleasant Arithmetic of Fiscal Austerity in Integrated Economies," NBER Working Papers 20200, National Bureau of Economic Research, Inc.

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