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Profit Taxation And The Elasticity Of The Corporate Income Tax Base: Evidence From German Corporate Tax Return Data

  • Dwenger, Nadja
  • Steiner, Viktor

This paper estimates the elasticity of corporate taxable income with respect to the average corporate tax rate. To control for the endogeneity of the tax rate, we use an instrumental variable approach, calculating the counterfactual average tax rate that a corporation would have faced in a particular period had there been no endogenous change in corporate profits. This counterfactual rate is derived from a microsimulation model based on tax return data. A statistically significant and relatively large point estimate of the tax base elasticity implies that a reduction in the statutory corporate tax rate would reduce corporate tax receipts less than proportionally.

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Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 65 (2012)
Issue (Month): 1 (March)
Pages: 118-50

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Handle: RePEc:ntj:journl:v:65:y:2012:i:1:p:118-50
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  1. Martin Feldstein, 1995. "Tax Avoidance and the Deadweight Loss of the Income Tax," NBER Working Papers 5055, National Bureau of Economic Research, Inc.
  2. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 305-22, June.
  3. Kevin A. Hassett & Alex Brill, 2007. "Revenue-Maximizing Corporate Income Taxes," Working Papers 49742, American Enterprise Institute.
  4. Kimberly Clausing, 2007. "Corporate tax revenues in OECD countries," International Tax and Public Finance, Springer, vol. 14(2), pages 115-133, April.
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  6. Clausing, Kimberly A., 2009. "Multinational Firm Tax Avoidance and Tax Policy," National Tax Journal, National Tax Association, vol. 62(4), pages 703-25, December.
  7. Michael P. Devereux, 2008. "Business taxation in a globalized world," Oxford Review of Economic Policy, Oxford University Press, vol. 24(4), pages 625-638, winter.
  8. Leslie G. Godfrey, 1999. "Instrument Relevance in Multivariate Linear Models," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 550-552, August.
  9. Nadja Dwenger & Viktor Steiner, 2014. "Financial leverage and corporate taxation: evidence from German corporate tax return data," International Tax and Public Finance, Springer, vol. 21(1), pages 1-28, February.
  10. Roger Gordon & Laura Kalambokidis & Joel Slemrod, 2003. "A New Summary Measure of the Effective Tax Rate on Investment," NBER Working Papers 9535, National Bureau of Economic Research, Inc.
  11. Aleksandra Riedl & Silvia Rocha-Akis, 2007. "Testing the tax competition theory: How elastic are national tax bases in western Europe?," Department of Economics Working Papers wuwp112, Vienna University of Economics and Business, Department of Economics.
  12. Merrill, Peter R., 2010. "Corporate Tax Policy For The 21st Century," National Tax Journal, National Tax Association, vol. 63(4), pages 623-33, December.
  13. Cooper, Michael & Knittel, Matthew, 2006. "Partial Loss Refundability: How Are Corporate Tax Losses Used?," National Tax Journal, National Tax Association, vol. 59(3), pages 651-63, September.
  14. Alan J. Auerbach, 2007. "Why Have Corporate Tax Revenues Declined? Another Look," CESifo Economic Studies, CESifo, vol. 53(2), pages 153-171, June.
  15. John Shea, 1997. "Instrument Relevance in Multivariate Linear Models: A Simple Measure," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 348-352, May.
  16. Gruber, Jon & Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, Elsevier, vol. 84(1), pages 1-32, April.
  17. repec:clu:wpaper:0304-15 is not listed on IDEAS
  18. Gumpert, Anna & Hines Jr, James R & Schnitzer, Monika, 2012. "The use of tax havens in exemption regimes," CEPR Discussion Papers 8943, C.E.P.R. Discussion Papers.
  19. Frank Fossen & Stefan Bach, 2008. "Reforming the German Local Business Tax - Lessons from an International Comparison and a Microsimulation Analysis," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 64(2), pages 245-272, June.
  20. Seth H. Giertz, 2010. "The Elasticity of Taxable Income during the 1990s: New Estimates and Sensitivity Analyses," Southern Economic Journal, Southern Economic Association, vol. 77(2), pages 406-433, October.
  21. Stefan Bach & Nadja Dwenger, 2007. "Unternehmensbesteuerung: trotz hoher Steuersätze mäßiges Aufkommen," DIW Wochenbericht, DIW Berlin, German Institute for Economic Research, vol. 74(5), pages 57-65.
  22. Kopczuk, Wojciech, 2005. "Tax bases, tax rates and the elasticity of reported income," Journal of Public Economics, Elsevier, vol. 89(11-12), pages 2093-2119, December.
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