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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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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. 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.
  3. Simon Loretz, 2008. "Corporate taxation in the OECD in a wider context," Working Papers 0821, Oxford University Centre for Business Taxation.
  4. Hans Bacher & Marius Brülhart, 2013. "Progressive taxes and firm births," International Tax and Public Finance, Springer, vol. 20(1), pages 129-168, February.
  5. 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.
  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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