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Effective Profit Taxation and the Elasticity of the Corporate Income Tax Base: Evidence from German Corporate Tax Return Data

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  • Nadja Dwenger
  • Viktor Steiner

Abstract

We estimate the elasticity of corporate taxable income with respect to the effective corporate tax rate on the basis of a pseudo-panel constructed from corporate tax return micro data for the period 1998-2001, a period which saw the introduction of a major corporate tax reform in Germany. Endogeneity of the effective tax rate is controlled for by an instrumental variable approach. Our instrument for the observed effective corporate tax rate is the counterfactual effective tax rate a corporation would face in a particular period had there be no endogenous change of corporate profits. This counterfactual is obtained from a detailed microsimulation model of the corporate sector based on tax return micro data. We find a statistically significant and relatively large point estimate of the average tax base elasticity, which implies that a reduction of the statutory corporate tax rate would reduce corporate tax receipts less than proportionally due to income shifting activities. We also find some statistically weak evidence for the hypothesis that the tax base elasticity is higher for corporations that may benefit from various forms of tax shields.

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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 829.

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Length: 32 p.
Date of creation: 2008
Date of revision:
Handle: RePEc:diw:diwwpp:dp829

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Keywords: corporate income taxation; tax base elasticity; micro simulation;

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Cited by:
  1. Copenhagen Economics, 2011. "Elasticities of Financial Instruments, Profits and Remuneration," Taxation Papers, Directorate General Taxation and Customs Union, European Commission 30, Directorate General Taxation and Customs Union, European Commission.
  2. Becker, Johannes & Fuest, Clemens & Riedel, Nadine, 2012. "Corporate tax effects on the quality and quantity of FDI," European Economic Review, Elsevier, Elsevier, vol. 56(8), pages 1495-1511.
  3. Lenka Janickova, 2013. "Effective Tax Rates in the Moravian-Silesian Region," DANUBE: Law and Economics Review, European Association Comenius - EACO, European Association Comenius - EACO, issue 1, pages 83-92, March.
  4. 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.
  5. Liu, Li & Altshuler, Rosanne, 2013. "Measuring The Burden Of The Corporate Income Tax Under Imperfect Competition," National Tax Journal, National Tax Association, vol. 66(1), pages 215-37, March.
  6. Boryana Madzharova, 2012. "Intertemporal Income Shifting in Expectation of Lower Corporate Tax Rates: The Tax Reforms in Central and Eastern Europe," CERGE-EI Working Papers wp462, The Center for Economic Research and Graduate Education - Economic Institute, Prague.

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