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Effective Profit Taxation and the Elasticity of the Corporate Income Tax Base: Evidence from German Corporate Tax Return Data

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  • Nadja Dwenger
  • Viktor Steiner

Abstract

We estimate the elasticity of corporate taxable income with respect to the effective corporate tax rate on the basis of a pseudo-panel constructed from corporate tax return micro data for the period 1998-2001, a period which saw the introduction of a major corporate tax reform in Germany. Endogeneity of the effective tax rate is controlled for by an instrumental variable approach. Our instrument for the observed effective corporate tax rate is the counterfactual effective tax rate a corporation would face in a particular period had there be no endogenous change of corporate profits. This counterfactual is obtained from a detailed microsimulation model of the corporate sector based on tax return micro data. We find a statistically significant and relatively large point estimate of the average tax base elasticity, which implies that a reduction of the statutory corporate tax rate would reduce corporate tax receipts less than proportionally due to income shifting activities. We also find some statistically weak evidence for the hypothesis that the tax base elasticity is higher for corporations that may benefit from various forms of tax shields.

Suggested Citation

  • Nadja Dwenger & Viktor Steiner, 2008. "Effective Profit Taxation and the Elasticity of the Corporate Income Tax Base: Evidence from German Corporate Tax Return Data," Discussion Papers of DIW Berlin 829, DIW Berlin, German Institute for Economic Research.
  • Handle: RePEc:diw:diwwpp:dp829
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Nadja Dwenger & Viktor Steiner, 2014. "Financial leverage and corporate taxation: evidence from German corporate tax return data," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(1), pages 1-28, February.
    2. Becker, Johannes & Fuest, Clemens & Riedel, Nadine, 2012. "Corporate tax effects on the quality and quantity of FDI," European Economic Review, Elsevier, vol. 56(8), pages 1495-1511.
    3. Liu, Li & Altshuler, Rosanne, 2013. "Measuring the Burden of the Corporate Income Tax Under Imperfect Competition," National Tax Journal, National Tax Association;National Tax Journal, vol. 66(1), pages 215-237, March.
    4. Lenka Janickova, 2013. "Effective Tax Rates in the Moravian-Silesian Region," DANUBE: Law and Economics Review, European Association Comenius - EACO, issue 1, pages 83-92, March.
    5. Boryana Madzharova, 2012. "Intertemporal Income Shifting in Expectation of Lower Corporate Tax Rates: The Tax Reforms in Central and Eastern Europe," CERGE-EI Working Papers wp462, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    6. Lina Cui, 2013. "A Markov Chain Analysis on the Impact of German Tax Loss Offset Restrictions," Economic Papers, The Economic Society of Australia, vol. 32(1), pages 122-134, March.
    7. Ruud A. de Mooij & Ikuo Saito, 2014. "Japan’s Corporate Income Tax; Facts, Issues and Reform Options," IMF Working Papers 14/138, International Monetary Fund.
    8. Copenhagen Economics, 2011. "Elasticities of Financial Instruments, Profits and Remuneration," Taxation Papers 30, Directorate General Taxation and Customs Union, European Commission.

    More about this item

    Keywords

    corporate income taxation; tax base elasticity; micro simulation;

    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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