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Corporate tax policy and incorporation in the EU

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Author Info

  • Ruud de Mooij

    ()
    (CPB Netherlands Bureau for Economic Policy Analysis)

  • Gaetan Nicodeme

    (European Commission)

Abstract

In Europe, declining corporate tax rates have come along with rising tax-to-GDP ratios. This paper explores to what extent income shifting from the personal to the corporate tax base can explain these diverging developments. We exploit a panel of European data on legal form of business to analyze income shifting via incorporation. The results suggest that the effect is significant and large. It implies that the revenue effects of lower corporate tax rates possibly induced by tax competition - will partly show up in lower personal tax revenues rather than lower corporate tax revenues. Simulations suggest that between 12% and 21% of corporate tax revenue can be attributed to income shifting. Income shifting is found to have raised the corporate tax-to-GDP ratio by some 0.25%-points since the early 1990s.

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File URL: http://ec.europa.eu/taxation_customs/resources/documents/taxation/gen_info/economic_analysis/tax_papers/taxation_paper_11_corporate_en.pdf
File Function: final version, 2007
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Bibliographic Info

Paper provided by Directorate General Taxation and Customs Union, European Commission in its series Taxation Papers with number 11.

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Length: 32 pages
Date of creation: Nov 2007
Date of revision: Nov 2007
Publication status: Published in International Tax and Public Finance, 2008, 15, pp. 478-498.
Handle: RePEc:tax:taxpap:0011

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Web page: http://ec.europa.eu/taxation_customs/index_en.htm
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Related research

Keywords: European Union; Corporate tax; Personal tax; Incorporation; Income shifting;

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References

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  1. Nicodeme, Gaetan, 2006. "Corporate Tax Competition and Coordination in the European Union: What do we know? Where do we stand?," MPRA Paper 107, University Library of Munich, Germany.
  2. Clemens Fuest & Alfons Weichenrieder, 2002. "Tax Competition and Profit Shifting: On the Relationship between Personal and Corporate Tax Rates," CESifo Working Paper Series 781, CESifo Group Munich.
  3. Alfons Weichenrieder, 2005. "(Why) Do we need Corporate Taxation?," CESifo Working Paper Series 1495, CESifo Group Munich.
  4. El-Agraa,Ali (ed.), 2007. "The European Union," Cambridge Books, Cambridge University Press, number 9780521874434, October.
  5. Gaëtan Nicodème, 2006. "Corporate tax competition and coordination in the European Union: What do we know? Where do we stand?," European Economy - Economic Papers 250, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  6. Alan Auerbach, 2006. "Why have Corporate Tax Revenues Declined? Another Look," CESifo Working Paper Series 1785, CESifo Group Munich.
  7. Austan Goolsbee, 1997. "Taxes, Organizational Form, and the Deadweight Loss of the Corporate Income Tax," NBER Working Papers 6173, National Bureau of Economic Research, Inc.
  8. Jeffrey K. MacKie-Mason & Roger H. Gordon, 1994. "How Much Do Taxes Discourage Incorporation?," Public Economics 9401002, EconWPA.
  9. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  10. Roger H. Gordon & Jeffrey K. MacKie--Mason, 1994. "Tax Distortions to the Choice of Organizational Form," Public Economics 9401004, EconWPA, revised 18 Jan 1994.
  11. Rachel Griffith & Alexander Klemm, 2004. "What has been the tax competition experience of the past 20 years?," IFS Working Papers W04/05, Institute for Fiscal Studies.
  12. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition," Economic Policy, CEPR & CES & MSH, vol. 17(35), pages 449-495, October.
  13. Annette Alstadsæter, 2003. "The Dual Income Tax and Firms' Income Shifting through the Choice of Organizational Form and Real Capital Investments," CESifo Working Paper Series 1018, CESifo Group Munich.
  14. DeAngelo, Harry & DeAngelo, Linda & Skinner, Douglas J., 2004. "Are dividends disappearing? Dividend concentration and the consolidation of earnings," Journal of Financial Economics, Elsevier, vol. 72(3), pages 425-456, June.
  15. Goolsbee, Austan, 2004. "The impact of the corporate income tax: evidence from state organizational form data," Journal of Public Economics, Elsevier, vol. 88(11), pages 2283-2299, September.
  16. Michael Devereux & Rachel Griffith & Alexander Klemm, 2004. "Why has the UK corporation tax raised so much revenue?," Fiscal Studies, Institute for Fiscal Studies, vol. 25(4), pages 367-388, December.
  17. Ruud Mooij, 2005. "Will Corporate Income Taxation Survive?," De Economist, Springer, vol. 153(3), pages 277-301, 09.
  18. Roger H. Gordon & Joel Slemrod, 1998. "Are "Real" Responses to Taxes Simply Income Shifting Between Corporate and Personal Tax Bases?," NBER Working Papers 6576, National Bureau of Economic Research, Inc.
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