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Modelling Behavioural Responses to Profit Taxation: The Case of the UK Corporation Tax

  • John Creedy
  • Norman Gemmell

This paper examines behavioural responses by companies to changes in profit taxation in their home country. It argues that as well as distinguishing real from shifting responses for profits, it is important to separate the responses of gross profits from those for deductions (such as claims for past or current losses) where these are endogenously related to gross profits declared at home. This occurs in the UK and many other corporate tax regimes. This endogenous response can be expected to differ over the business cycle and, using a microsimulation model of the UK corporate tax regime, it is shown that this can be important for empirical estimates of firms’ overall behavioural responses especially, but not exclusively, during cyclical downturns. It is shown also that endogenous responses of deductions to real or shifting responses for gross profits can be expected to be asymmetrical between periods of above- and below-trend growth.

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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 998.

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Length: 52 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:mlb:wpaper:998
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
Fax: +61 3 8344 6899
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  1. 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.
  2. John Creedy & Norman Gemmell, 2007. "Corporation Tax Revenue Growth in the UK: A Microsimulation Analysis," Working Papers 0713, Oxford University Centre for Business Taxation.
  3. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  4. Michael P. Devereux & R. Glenn Hubbard, 2000. "Taxing Multinationals," NBER Working Papers 7920, National Bureau of Economic Research, Inc.
  5. Jon Gruber & Emmanuel Saez, 2000. "The Elasticity of Taxable Income: Evidence and Implications," NBER Working Papers 7512, National Bureau of Economic Research, Inc.
  6. Alex Bakker & John Creedy, 1999. "Macroeconomic variables and income inequality in New Zealand: An exploration using conditional mixture distributions," New Zealand Economic Papers, Taylor & Francis Journals, vol. 33(2), pages 59-79.
  7. repec:tpr:qjecon:v:109:y:1994:i:1:p:149-82 is not listed on IDEAS
  8. Creedy, John & Gemmell, Norman, 2008. "Corporation tax buoyancy and revenue elasticity in the UK," Economic Modelling, Elsevier, vol. 25(1), pages 24-37, January.
  9. Harry Grubert & Joel Slemrod, 1994. "The Effect of Taxes on Investment and Income Shifting to Puerto Rico," NBER Working Papers 4869, National Bureau of Economic Research, Inc.
  10. James R. Hines & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 149-182.
  11. Huizinga, Harry & Laeven, Luc, 2007. "International Profit Shifting within European Multinationals," CEPR Discussion Papers 6048, C.E.P.R. Discussion Papers.
  12. 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.
  13. Michael Devereux & Alexander Klemm, 2003. "Measuring taxes on income from capital: evidence from the UK," IFS Working Papers W03/03, Institute for Fiscal Studies.
  14. James R. Hines, Jr. & Eric M. Rice, 1990. "Fiscal Paradise: Foreign Tax Havens and American Business," NBER Working Papers 3477, National Bureau of Economic Research, Inc.
  15. Martin Feldstein, 1999. "Tax Avoidance And The Deadweight Loss Of The Income Tax," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 674-680, November.
  16. repec:sae:niesru:v:140:y::i:1:p:98-115 is not listed on IDEAS
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