IDEAS home Printed from https://ideas.repec.org/p/ipt/taxref/201608.html
   My bibliography  Save this paper

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

Author

Abstract

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.

Suggested Citation

  • Alvarez-Martinez, Maria Teresa & Barrios, Salvador & d'Andria, Diego & Gesualdo, Maria & Pontikakis, Dimitrios & Pycroft, Jonathan, 2016. "Modelling corporate tax reforms in the EU: New simulations with the CORTAX model," JRC Working Papers on Taxation & Structural Reforms 2016-08, Joint Research Centre.
  • Handle: RePEc:ipt:taxref:201608
    as

    Download full text from publisher

    File URL: https://publications.jrc.ec.europa.eu/repository/handle/JRC104678
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    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. 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.
    3. 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.
    4. Edward D Kleinbard, 2015. "Reimagining capital income taxation," Working Papers 1524, Oxford University Centre for Business Taxation.
    5. Ruud Mooij & Michael Devereux, 2011. "An applied analysis of ACE and CBIT reforms in the EU," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(1), pages 93-120, February.
    6. 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, August.
    7. 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 - Leibniz Centre for European Economic Research.
    8. 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.
    9. European Commission, 2014. "Taxation trends in the European Union: 2014 edition," Taxation trends 2014, Directorate General Taxation and Customs Union, European Commission.
    10. 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.
    11. 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)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Diego d’Andria & Dimitrios Pontikakis & Agnieszka Skonieczna, 2018. "Towards a European R&D incentive? An assessment of R&D provisions under a common corporate tax base," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 27(5-6), pages 531-550, August.
    2. Barrios, Salvador & d'Andria, Diego & Gesualdo, Maria, 2020. "Reducing tax compliance costs through corporate tax base harmonization in the European Union," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 41(C).
    3. Olgica Glavaški & Emilija Beker Pucar & Marina Beljić & Stefan Stojkov, 2022. "Coordination vs. Competitiveness of Effective Average Tax Rates in Relation to FDI: The Case of Emerging EU Economies," Sustainability, MDPI, vol. 15(1), pages 1-20, December.
    4. Benjamin Carton & Emilio Fernández Corugedo & Mr. Benjamin L Hunt, 2019. "Corporate Tax Reform: From Income to Cash Flow Taxes," IMF Working Papers 2019/013, International Monetary Fund.
    5. Jochen Hundsdoerfer & Julia Wagner, 2020. "How accurately does the CCCTB apportionment formula allocate profits? An evaluation of the European Commission proposal," Journal of Business Economics, Springer, vol. 90(4), pages 495-536, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ruud de Mooij & Michael P. Devereux, 2008. "Alternative Systems of Business Tax in Europe: An applied analysis of ACE and CBIT Reforms," Taxation Studies 0023, Directorate General Taxation and Customs Union, European Commission.
    2. Ruud Mooij & Michael Devereux, 2011. "An applied analysis of ACE and CBIT reforms in the EU," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(1), pages 93-120, February.
    3. 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.
    4. Devereux, Michael P., 2012. "Issues in the Design of Taxes on Corporate Profit," National Tax Journal, National Tax Association;National Tax Journal, vol. 65(3), pages 709-730, September.
    5. Streif, Frank, 2015. "Tax competition in Europe: Europe in competition with other world regions?," ZEW Discussion Papers 15-082, ZEW - Leibniz Centre for European Economic Research.
    6. Michael P. Devereux & Peter Birch Sørensen, 2006. "The Corporate Income Tax: international trends and options for fundamental reform," European Economy - Economic Papers 2008 - 2015 264, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    7. Sanz Labrador, Ismael & Sanz-Sanz, José Félix, 2013. "Política fiscal y crecimiento económico: consideraciones microeconómicas y relaciones macroeconómicas," Macroeconomía del Desarrollo 5367, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    8. European Commission, 2011. "Tax Reforms in EU Member States 2011: tax policy challenges for economic growth and fiscal sustainability," Taxation Papers 28, Directorate General Taxation and Customs Union, European Commission.
    9. Finke, Katharina & Heckemeyer, Jost H. & Spengel, Christoph, 2014. "Assessing the impact of introducing an ACE regime: A behavioural corporate microsimulation analysis for Germany," ZEW Discussion Papers 14-033, ZEW - Leibniz Centre for European Economic Research.
    10. Nicola Branzoli & Antonella Caiumi, 2020. "How effective is an incremental ACE in addressing the debt bias? Evidence from corporate tax returns," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(6), pages 1485-1519, December.
    11. Koethenbuerger, Marko & Stimmelmayr, Michael, 2014. "Corporate deductibility provisions and managerial incentives," Journal of Public Economics, Elsevier, vol. 111(C), pages 120-130.
    12. Marko Köthenbürger & Michael Stimmelmayr, 2009. "Corporate Taxation and Corporate Governance," CESifo Working Paper Series 2881, CESifo.
    13. Hebous, Shafik & Ruf, Martin, 2017. "Evaluating the effects of ACE systems on multinational debt financing and investment," Journal of Public Economics, Elsevier, vol. 156(C), pages 131-149.
    14. Florian Chatagny & Marko Koethenbuerger & Michael Stimmelmayr, 2017. "Introducing an IP license box in Switzerland: quantifying the effects," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(6), pages 927-961, December.
    15. Sijbren Cnossen, 2002. "Tax Policy in the European Union: A Review of Issues and Options," CESifo Working Paper Series 758, CESifo.
    16. Barrios, Salvador & d'Andria, Diego & Gesualdo, Maria, 2020. "Reducing tax compliance costs through corporate tax base harmonization in the European Union," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 41(C).
    17. Lammersen, Lothar, 2002. "Investment Decisions and Tax Revenues Under an Allowance for Corporate Equity," ZEW Discussion Papers 02-47, ZEW - Leibniz Centre for European Economic Research.
    18. Cnossen, S., 2002. "Tax policy in the European Union : a review of issues and options," Research Memorandum 023, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    19. Ramón E. López & Pablo Gutiérrez Cubillos & Eugenio Figueroa, 2020. "The Tax Paradox and Weak Tax Neutrality," Southern Economic Journal, John Wiley & Sons, vol. 86(3), pages 1150-1169, January.
    20. Toshiyuki Uemura, 2023. "Corporate Tax Increases and Shareholder-Level Capital Income Tax Neutrality in Japan -An Analysis of Fundamental Reforms Using Effective Tax Rates-," Discussion Paper Series 257, School of Economics, Kwansei Gakuin University.

    More about this item

    Keywords

    Computable General Equilibrium model; CORTAX; CCTB; CCCTB; Profit-shifting;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ipt:taxref:201608. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Publication Officer (email available below). General contact details of provider: https://edirc.repec.org/data/ipjrces.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.