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Corporate Tax Policy, Entrepreneurship and Incorporation in the EU

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  • Ruud A. de Mooij

    ()
    (Erasmus Universiteit Rotterdam)

  • Gaetan Nicodeme

    ()
    (European Commission, and Solvay Business School (ULB))

Abstract

In Europe, declining corporate tax rates have come along with rising tax-to-GDP ratios. Thispaper explores to what extent income shifting from the personal to the corporate tax base canexplain these diverging developments. We exploit a panel of European data on firm births andlegal form of business to analyze income shifting via increased entrepreneurship andincorporation. The results suggest that lower corporate taxes exert an ambiguous effect onentrepreneurship. The effect on incorporation is significant and large. It implies that therevenue effects of lower corporate tax rates – possibly induced by tax competition -- partlyshow up in lower personal tax revenues rather than lower corporate tax revenues. Simulationssuggest that between 10% and 17% of corporate tax revenue can be attributed to incomeshifting. Income shifting is found to have raised the corporate tax-to-GDP ratio by some0.2%-points since the early 1990s. This paper has been awarded the Peggy and Richard Musgrave Award 2007. See http://www.iipf.org/msgpz.htm. It has also led to a publication in International Tax and Public Finance .

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 07-030/3.

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Date of creation: 22 Mar 2007
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Handle: RePEc:dgr:uvatin:20070030

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Keywords: Corporate tax; Personal tax; Entrepreneurship; Incorporation; Income shifting;

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