IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Modelling corporate tax reforms in the EU: New simulations with the CORTAX model

Listed author(s):

This study investigates the economic impact of a recent proposal for a common corporate tax base (CCTB), European Commission (2016a), and a common consolidated corporate tax base with formula apportionment (CCCTB) within the EU, European Commission (2016b). On top of the common base, it considers proposals to reduce the debt bias in corporate taxation. To do so, we employ an applied general equilibrium model (CORTAX) covering all EU Member States, featuring different firm types and modelling many key features of corporate tax regimes, including multinational profit shifting, investment decisions, loss compensation and the debt-equity choice of firms. First, the economic impact of C(C)CTB is assessed, restricting the scope of the reforms to multinationals only. Macroeconomic results show that the common tax base simulations directly affect the cost of capital, which on average falls across the EU, boosting investment, and therefore driving the increase in GDP. Second, C(C)CTB is simulated together with proposals to reduce or eliminate the debt bias in corporate taxation, principally: the comprehensive business income tax (CBIT), the allowance for corporate equity (ACE) and the allowance for corporate capital (ACC). From a financing prospective, all proposals incentivise firms to rely less on debt-financing. From a macroeconomic perspective, the simulations which narrow the tax base by introducing addition deductions, i.e. ACE and ACC, raise GDP, despite the fact that the (ex-ante) CIT revenue is maintained by adjusting the CIT rate. The opposite is the case for the CBIT, which causes a fall in GDP. Third, a group of sensitivity simulations are presented to check for robustness. Among the insights from the sensitivity simulations, one notes that the inclusion of domestic firms in the CCCTB proposal somewhat increases the positive impact on GDP. A broader harmonised tax base results in lower welfare and GDP outcomes than a narrower harmonised tax base, because it more directly impacts the marginal investment decision. Reducing profit shifting slightly lowers investment, though on balance does not negatively impact welfare. The model results are robust to varying the capital-labour substitutability. In summary, the results of this economic modelling evaluation suggest that a fairer and more efficient tax system can be introduced whilst maintaining, and perhaps improving, GDP and welfare in the EU.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: https://ec.europa.eu/jrc/sites/jrcsh/files/jrc104678.pdf
Download Restriction: no

Paper provided by Joint Research Centre (Seville site) in its series JRC Working Papers on Taxation & Structural Reforms with number 2016-08.

as
in new window

Length: 124 pages
Date of creation: Dec 2016
Handle: RePEc:ipt:taxref:201608
Contact details of provider: Postal:
C/ Inca Garcilaso, s/n 41092 Seville

Phone: +34 954 48 8318
Fax: +34 954 48 8300
Web page: https://ec.europa.eu/jrc/en

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as
in new window


  1. Michael Devereux & Harold Freeman, 1991. "A general neutral profits tax," Fiscal Studies, Institute for Fiscal Studies, vol. 12(3), pages 1-15, August.
  2. Marcel P. Timmer & Erik Dietzenbacher & Bart Los & Robert Stehrer & Gaaitzen J. Vries, 2015. "An Illustrated User Guide to the World Input–Output Database: the Case of Global Automotive Production," Review of International Economics, Wiley Blackwell, vol. 23(3), pages 575-605, 08.
  3. Devereux, Michael P & Griffith, Rachel, 2003. "Evaluating Tax Policy for Location Decisions," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(2), pages 107-126, March.
  4. Spengel, Christoph & Ortmann-Babel, Martina & Zinn, Benedikt & Matenaer, Sebastian, 2012. "A common corporate tax base for Europe: An impact assessment of the draft council directive on a CC(C)TB," ZEW Discussion Papers 12-039, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  5. Boadway, Robin & Bruce, Neil, 1984. "A general proposition on the design of a neutral business tax," Journal of Public Economics, Elsevier, vol. 24(2), pages 231-239, July.
  6. Devereux, Michael P. & Griffith, Rachel, 1998. "Taxes and the location of production: evidence from a panel of US multinationals," Journal of Public Economics, Elsevier, vol. 68(3), pages 335-367, June.
  7. Alvarez Martinez, Maria Teresa & Barrios, Salvador & Bettendorf, Leon & d'Andria, Diego & Gesualdo, Maria & Loretz, Simon & Pontikakis, Dimitrios & Pycroft, Jonathan, 2016. "A New Calibration for CORTAX: A computable general equilibrium model for simulating corporate tax reforms," JRC Working Papers on Taxation & Structural Reforms 2016-09, Joint Research Centre (Seville site).
  8. Leon Bettendorf & Albert van der Horst, 2006. "Documentation of CORTAX," CPB Memorandum 161, CPB Netherlands Bureau for Economic Policy Analysis.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ipt:taxref:201608. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Publication Officer)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.