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Corporate Tax Policy and Incorporation in the EU

  • Ruud A. de Mooij

    (CPB Netherlands Bureau for Economic Policy Analysis, Erasmus University Rotterdam, CESifo and Tinbergen Institute)

  • Gaëtan Nicodème

    (European Commission, CEB (Solvay Business School) and ECARES (ULB))

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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Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 0716.

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Date of creation: 2007
Date of revision:
Handle: RePEc:btx:wpaper:0716
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  1. 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.
  2. 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.
  3. Alan J. Auerbach, 2006. "Why Have Corporate Tax Revenues Declined? Another Look," NBER Working Papers 12463, National Bureau of Economic Research, Inc.
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  7. 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.
  8. Ruud Mooij, 2005. "Will Corporate Income Taxation Survive?," De Economist, Springer, vol. 153(3), pages 277-301, 09.
  9. Alfons Weichenrieder, 2005. "(Why) Do we need Corporate Taxation?," CESifo Working Paper Series 1495, CESifo Group Munich.
  10. 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.
  11. 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.
  12. 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 Financial Affairs (DG ECFIN), European Commission.
  13. 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.
  14. 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.
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  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. 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.
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