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Behavioural Responses to Corporate Profit Taxation

  • John Creedy
  • Norman Gemmell

This paper examines behavioural responses by companies to changes in profit taxation in their home country. The elasticity of tax revenue with respect to changes in the corparation tax rate are decomposed into a variety of responses. As well as distinguishing real from profitshifting responses, it is important to separate the responses of gross profits from those of deductions (such as claims for past or current losses) where these are endogenously related to gross profits declared at home. This endogenous response can be expected to differ over the business cycle, which can be important for empirical estimates of aggregate behavioural responses especially, but not exclusively, during cyclical downturns. It is suggested that the revenue elasticity can be expected to be asymmetrical between periods of above- and belowtrend growth, arising from the asymmetric treatment of losses by the tax function.

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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1029.

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Length: 30 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:mlb:wpaper:1029
Contact details of provider: Postal: Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia
Phone: +61 3 8344 5355
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Web page: http://www.economics.unimelb.edu.au
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  1. Auerbach, Alan J, 1986. "The Dynamic Effects of Tax Law Asymmetries," Review of Economic Studies, Wiley Blackwell, vol. 53(2), pages 205-25, April.
  2. Cooper, Michael & Knittel, Matthew, 2006. "Partial Loss Refundability: How Are Corporate Tax Losses Used?," National Tax Journal, National Tax Association, vol. 59(3), pages 651-63, September.
  3. Creedy, John & Gemmell, Norman, 2008. "Corporation tax buoyancy and revenue elasticity in the UK," Economic Modelling, Elsevier, vol. 25(1), pages 24-37, January.
  4. Michael Devereux & Alexander Klemm, 2003. "Measuring taxes on income from capital: evidence from the UK," IFS Working Papers W03/03, Institute for Fiscal Studies.
  5. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September.
  6. Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-72, June.
  7. Martin Feldstein & James R. Hines Jr. & R. Glenn Hubbard, 1995. "The Effects of Taxation on Multinational Corporations," NBER Books, National Bureau of Economic Research, Inc, number feld95-2, August.
  8. Emmanuel Saez & Joel B. Slemrod & Seth H. Giertz, 2009. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," NBER Working Papers 15012, National Bureau of Economic Research, Inc.
  9. Bartelsman, Eric J & Beetsma, Roel, 2000. "Why Pay More? Corporate Tax Avoidance Through Transfer Pricing in OECD Countries," CEPR Discussion Papers 2543, C.E.P.R. Discussion Papers.
  10. Harry Grubert & Joel Slemrod, 1998. "The Effect Of Taxes On Investment And Income Shifting To Puerto Rico," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 365-373, August.
  11. Michael P. Devereux & R. Glenn Hubbard, 2000. "Taxing Multinationals," NBER Working Papers 7920, National Bureau of Economic Research, Inc.
  12. Altshuler, Rosanne & Auerbach, Alan J, 1990. "The Significance of Tax Law Asymmetries: An Empirical Investigation," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 61-86, February.
  13. Hines, James R. Jr., 1999. "Lessons from Behavioral Responses to International Taxation," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 305-22, June.
  14. Devereux, Michael P, 1989. "Tax Asymmetries, the Cost of Capital and Investment: Some Evidence from United Kingdom Panel Data," Economic Journal, Royal Economic Society, vol. 99(395), pages 103-12, Supplemen.
  15. Jon Gruber & Emmanuel Saez, 2000. "The Elasticity of Taxable Income: Evidence and Implications," NBER Working Papers 7512, National Bureau of Economic Research, Inc.
  16. Kimberly Clausing, 2007. "Corporate tax revenues in OECD countries," International Tax and Public Finance, Springer, vol. 14(2), pages 115-133, April.
  17. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470 Elsevier.
  18. Feldstein, Martin, 1995. "Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Scholarly Articles 2766676, Harvard University Department of Economics.
  19. Michael Devereux & Rachel Griffith & Alexander Klemm, 2004. "How has the UK corporation tax raised so much revenue?," IFS Working Papers W04/04, Institute for Fiscal Studies.
  20. Hines, J.R. & Rice, E.M., 1990. "Fiscal Paradise: Foreign Tax Havens And American Business," Papers 56, Princeton, Woodrow Wilson School - Discussion Paper.
  21. Grubert, Harry, 2003. "Intangible Income, Intercompany Transactions, Income Shifting, and the Choice of Location," National Tax Journal, National Tax Association, vol. 56(1), pages 221-42, March.
  22. Huizinga, Harry & Laeven, Luc, 2007. "International Profit Shifting within European Multinationals," CEPR Discussion Papers 6048, C.E.P.R. Discussion Papers.
  23. J. Barkley Rosser, 2009. "Introduction," Chapters, in: Handbook of Research on Complexity, chapter 1 Edward Elgar.
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