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Corporate Tax Policy, Entrepreneurship and Incorporation in the EU

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Author Info
Ruud de Mooij ()
Gaetan Nicodème ()

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Abstract

In Europe, declining corporate tax rates have come along with rising tax-to-GDP ratios. This paper explores to what extent income shifting from the personal to the corporate tax base can explain these diverging developments. We exploit a panel of European data on firm births and legal form of business to analyze income shifting via increased entrepreneurship and incorporation. The results suggest that lower corporate taxes exert an ambiguous effect on entrepreneurship. The effect on incorporation is significant and large. It implies that the revenue effects of lower corporate tax rates – possibly induced by tax competition -- partly show up in lower personal tax revenues rather than lower corporate tax revenues. Simulations suggest that between 10% and 17% of corporate tax revenue can be attributed to income shifting. Income shifting is found to have raised the corporate tax-to-GDP ratio by some 0.2%-points since the early 1990s.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 1883.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1883

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Related research
Keywords: corporate tax; personal tax; entrepreneurship; incorporation; income shifting;

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Find related papers by JEL classification:
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
M13 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - New Firms; Startups

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    Other versions:
  3. Robson, Martin T, 1998. " The Rise in Self-Employment amongst UK Males," Small Business Economics, Springer, vol. 10(3), pages 199-212, May. [Downloadable!] (restricted)
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    Other versions:
  6. Bruce, Donald, 2000. "Effects of the United States tax system on transitions into self-employment," Labour Economics, Elsevier, vol. 7(5), pages 545-574, September. [Downloadable!] (restricted)
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    Other versions:
  9. Clemens Fuest & Alfons Weichenrieder, 2002. "Tax Competition and Profit Shifting: On the Relationship between Personal and Corporate Tax Rates," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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    Other versions:
  13. Alstadsaeter, Annette, 2003. "The Dual Income Tax and Firms' Income Shifting through the Choice of Organizational Form and Real Capital Investments," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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    Other versions:
  15. Parker, Simon C, 1996. "A Time Series Model of Self-Employment under Uncertainty," Economica, London School of Economics and Political Science, vol. 63(251), pages 459-75, August. [Downloadable!] (restricted)
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    Other versions:
  17. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition," Economic Policy, CEPR, CES, MSH, vol. 17(35), pages 449-495, October. [Downloadable!] (restricted)
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  23. Luigi Guiso & Luigi Pistaferri & Fabiano Schivardi, 2002. "Insurance within the firm," 10th International Conference on Panel Data, Berlin, July 5-6, 2002 C3-1, International Conferences on Panel Data. [Downloadable!]
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  24. Alan J. Auerbach & James M. Poterba, 1987. "Why Have Corporate Tax Revenues Declined?," NBER Working Papers 2118, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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