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The Elasticity of Corporate Taxable Income: New Evidence from UK Tax Records

In: Business Taxation (Trans-Atlantic Public Economics Seminar)

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Abstract

We use the population of UK corporation tax returns between 2001 and 2008 to estimate the elasticity of corporate taxable income with respect to the statutory corporation tax rate. We analyse bunching in the distribution of taxable income at two kinks in the marginal rate schedule. We find an elasticity of between 0.14 and 0.18 for companies with profits around the £300k kink, implying a marginal deadweight cost of 8%. We find a much higher elasticity of between 0.54 and 0.57 for companies around the £10k kink. By matching the corporate tax return data with accounting records and analysing joint bunching in the corporate and personal tax system, we decompose this into two parts: an elasticity of total income with respect to the net of tax rate of between 0.2 and 0.3, and an elasticity of the share of income taken as profit with respect to the difference between the personal and corporate tax rates of between 0.04 and 0.07. These imply a marginal deadweight cost of the tax around £10k of around 25%. We find no evidence of intertemporal shifting of profit.
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Suggested Citation

  • Michael Devereux & Li Liu & Simon Loretz, 2012. "The Elasticity of Corporate Taxable Income: New Evidence from UK Tax Records," NBER Chapters, in: Business Taxation (Trans-Atlantic Public Economics Seminar), National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:13221
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    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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