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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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Author Info
Nadja Dwenger
Viktor Steiner

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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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Publisher 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
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Handle: RePEc:diw:diwwpp:dp829

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

Find related papers by JEL classification:
H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods

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  18. Stefan Bach & Hermann Buslei & Nadja Dwenger & Frank Fossen, 2008. "Dokumentation des Mikrosimulationsmodells BizTax zur Unternehmensbesteuerung in Deutschland," Data Documentation 29, DIW Berlin, German Institute for Economic Research. [Downloadable!]
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