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Corporate Tax Policy, Entrepreneurship and Incorporation in the EU

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  • Ruud A. De Mooij
  • Gaëtan J.A. Nicodème

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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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1883.

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

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

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Citations

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Cited by:
  1. Simone Bertoli & Francesco Farina, 2007. "The functional distribution of income: a review of the theoretical literature and of the empirical evidence around its recent pattern in European countries," Department of Economic Policy, Finance and Development (DEPFID) University of Siena 005, Department of Economic Policy, Finance and Development (DEPFID), University of Siena.
  2. Hans Bacher & Marius Brülhart, 2013. "Progressive taxes and firm births," International Tax and Public Finance, Springer, vol. 20(1), pages 129-168, February.
  3. Doris Prammer, 2011. "Quality of taxation and the crisis: Tax shifts from a growth perspective," Taxation Papers 29, Directorate General Taxation and Customs Union, European Commission.
  4. Simon Loretz, 2008. "Corporate taxation in the OECD in a wider context," Working Papers 0821, Oxford University Centre for Business Taxation.
  5. Tomasz Skica & Tomasz Wo³owiec & Pavel Pavlov, 2014. "Eeconomic Relations Between Personal And Corporate Income Tax," "e-Finanse", University of Information Technology and Management, Institute of Financial Research and Analysis, vol. 10(1), pages 60-68, June.
  6. European Commission, 2011. "Tax Reforms in EU Member States 2011: tax policy challenges for economic growth and fiscal sustainability," Taxation Papers 28, Directorate General Taxation and Customs Union, European Commission.
  7. Marcin Piatkowski & Mariusz Jarmuzek, 2008. "Zero Corporate Income Tax in Moldova," IMF Working Papers 08/203, International Monetary Fund.

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