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Modelling Responses to Profit Taxation over the Economic Cycle: The Case of the UK Corporation Tax

Listed author(s):
  • John Creedy
  • Norman Gemmell

This paper considers behavioural responses of companies´ declared profits to changes in profit tax rates. Using microsimulation modelling based on the UK corporate tax system, it argues that the cyclical volatility of firms´ gross profits and off-setting deductions are potentially important but distinct determinants of the size of these behavioural responses. This arises both because deductions claimed are typically a relatively large fraction of declared gross profits and because of the endogenous relationships between various deductions and those profits. The endogeneity arises mainly from asymmetries in the tax treatment of losses, which generates an asymmetric cycle in the claiming of losses and capital allowances as profit off-sets. Microsimulation modelling shows that these aspects can be sizeable compared with recent estimates of firms´ profit-shifting responses found in the empirical literature.

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Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 66 (2010)
Issue (Month): 3 (September)
Pages: 207-235

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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201009)66:3_207:mrtpto_2.0.tx_2-4
DOI: 10.1628/001522108X537355
Contact details of provider: Web page: https://www.mohr.de/fa

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  1. Alan J. Auerbach & James M. Poterba, 1987. "Why Have Corporate Tax Revenues Declined?," NBER Working Papers 2118, National Bureau of Economic Research, Inc.
  2. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
  3. Rosanne Altshuler & Alan J. Auerbach, 1990. "The Significance of Tax Law Asymmetries: An Empirical Investigation," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 61-86.
  4. Clausing, Kimberly A., 2009. "Multinational Firm Tax Avoidance and Tax Policy," National Tax Journal, National Tax Association, vol. 62(4), pages 703-725, December.
  5. Alan J. Auerbach, 2006. "Why Have Corporate Tax Revenues Declined? Another Look," NBER Working Papers 12463, National Bureau of Economic Research, Inc.
  6. Bruce A. Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," NBER Working Papers 11299, National Bureau of Economic Research, Inc.
  7. Alan J. Auerbach, 1983. "The Dynamic Effects of Tax Law Asymmetries," NBER Working Papers 1152, National Bureau of Economic Research, Inc.
  8. Kevin A. Hassett & Alex Brill, 2007. "Revenue-Maximizing Corporate Income Taxes," AEI Economics Working Papers 49742, American Enterprise Institute.
  9. Kimberly Clausing, 2007. "Corporate tax revenues in OECD countries," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(2), pages 115-133, April.
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