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Behavioural Responses to Corporate Profit Taxation

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Author Info
John Creedy
Norman Gemmell

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Abstract

This paper examines behavioural responses by companies to changes in profit taxation in their home country. The elasticity of tax revenue with respect to changes in the corparation tax rate are decomposed into a variety of responses. As well as distinguishing real from profitshifting responses, it is important to separate the responses of gross profits from those of deductions (such as claims for past or current losses) where these are endogenously related to gross profits declared at home. This endogenous response can be expected to differ over the business cycle, which can be important for empirical estimates of aggregate behavioural responses especially, but not exclusively, during cyclical downturns. It is suggested that the revenue elasticity can be expected to be asymmetrical between periods of above- and belowtrend growth, arising from the asymmetric treatment of losses by the tax function.

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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1029.

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Length: 30 pages
Date of creation: 2008
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Handle: RePEc:mlb:wpaper:1029

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  2. Auerbach, Alan J, 1986. "The Dynamic Effects of Tax Law Asymmetries," Review of Economic Studies, Blackwell Publishing, vol. 53(2), pages 205-25, April. [Downloadable!] (restricted)
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  4. Michael Devereux & Rachel Griffith & Alexander Klemm, 2004. "How has the UK corporation tax raised so much revenue?," IFS Working Papers W04/04, Institute for Fiscal Studies. [Downloadable!]
  5. Altshuler, Rosanne & Auerbach, Alan J, 1990. "The Significance of Tax Law Asymmetries: An Empirical Investigation," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 61-86, February. [Downloadable!] (restricted)
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  6. Michael P. Devereux & Alexander Klemm, 2003. "Measuring Taxes on Income from Capital: Evidence from the UK," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  7. Harry Grubert & Joel Slemrod, 1998. "The Effect Of Taxes On Investment And Income Shifting To Puerto Rico," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 365-373, August. [Downloadable!] (restricted)
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  8. Bartelsman, Eric J. & Beetsma, Roel M. W. J., 2003. "Why pay more? Corporate tax avoidance through transfer pricing in OECD countries," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2225-2252, September. [Downloadable!] (restricted)
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  9. James R. Hines, Jr. & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," NBER Working Papers 3477, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-72, June. [Downloadable!] (restricted)
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  11. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470 Elsevier. [Downloadable!] (restricted)
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  12. Devereux, Michael P, 1989. "Tax Asymmetries, the Cost of Capital and Investment: Some Evidence from United Kingdom Panel Data," Economic Journal, Royal Economic Society, vol. 99(395), pages 103-12, Supplemen. [Downloadable!] (restricted)
  13. John Creedy & Norman Gemmell, 2007. "Corporation Tax Buoyancy and Revenue Elasticity in the UK," Department of Economics - Working Papers Series 985, The University of Melbourne. [Downloadable!]
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  14. Huizinga, Harry & Laeven, Luc, 2007. "International Profit Shifting within European Multinationals," CEPR Discussion Papers 6048, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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