The economic effects of EU-reforms in corporate income tax systems

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Figure 3.3 Welfare effects of selective CCTB, with tax haven and location choice Malta Luxembourg Spain Czech Republic Germany France Finland Italy Netherlands Poland Europe Greece Slovenia Austria Sweden Denmark Slovak Hungary Portugal United Kingdom Ireland Cyprus Bulgaria Lithuania Latvia Romania Estonia Belgium -0.5 0.0 0.5 selective idem, with extended CORTAX Closer inspection of the Tables in Appendix B learns that the difference between Tables 3.3 and 3.4 is caused by the inclusion of tax havens, not discrete location choices. The reason is that the location of discrete investments is determined by differences in tax rates between European countries, not by changes in the average tax rate in the EU. Hence, while the inclusion of discrete location choices does affect the consequences of the CCTB reforms for individual countries, it hardly affects the effects for the EU as a whole. The inclusion of outside tax havens, in contrast, implies that corporate tax rate reduction in Europe is more beneficial as fewer profits are shifted outside the EU. It raises the question how important profit shifting to outside tax havens really is. The basic version of CORTAX takes an extreme position where profit shifting between Europe and outside countries is very small (only the manipulation of transfer prices vis a vis Japan and the US is included). In the extended version of CORTAX, the elasticity of profit shifting to tax havens is set at a high value. Empirical evidence does not give us sufficient guidance as to what is the most plausible case. In our view, it seems plausible that the effects of the selective CCTB are somewhere between the simulations of Tables 3.3 and 3.4. In section 2.1 we discuss the alternative assumption on discrete location where not only intra- EU investments, but also investment from Japan and the US can respond to changes in corporate tax rates. Table 3.5 summarises the EU-wide economic effects of the CCTB given this alternative allocation choice. 40
Table 3.5 Economic effects for the EU of CCTB-reforms, selectively applied to multinationals, in the presence of tax havens and global discrete location CCTB-WG20 CCTB-WG25 CCTB-Euav Corporate tax rate -3.1 -2.5 -0.3 Corporate tax revenue in % GDP (ex-post) 0.1 0.1 0.0 Cost of capital 0.1 0.1 0.0 Investment -0.5 -0.4 0.0 Wage -0.1 -0.1 0.0 Employment -0.1 0.0 0.0 GDP 0.0 0.0 0.0 Welfare 0.0 0.0 0.0 3.5 Is there a rationale for base broadening and rate reduction? CORTAX simulations suggest that a European-wide policy of base broadening and rate reduction in corporate taxation is unlikely to be welfare improving. Nevertheless, we have seen that a number of European countries have pursued such a policy during the last decades. And these policies have also found support among economists. For instance, Sørensen (2006) argues that “by broadening the corporate tax base and lowering the statutory rate, a country may be able to raise a given amount of corporate tax revenue in a more efficient manner.” Haufler and Schjelderup (2000) conclude that “in the presence of multinational firms capable of shifting profits abroad, it becomes optimal for the government to reduce statutory rates and to lower the depreciation allowances to meet the revenue requirement”. Devereux, Griffith and Klemm (2002) state that “rate-cutting, base broadening tax reforms are thus the optimal strategy from the governments perspective”. How do these observations compare with the results from CORTAX? The CORTAX results are not inconsistent with the above conclusions from economists. The reason is that the authors above refer to corporate tax reforms by individual countries. When in CORTAX an individual country broadens its base and reduces it rate, it will benefit from attracting multinational profits from within the EU and from improving the location advantage for discrete investment choices. For a number of individual countries, CORTAX therefore finds that base broadening and rate reduction is an attractive policy from a welfare point of view (see e.g. Devereux and De Mooij, 2009). These are precisely the mechanisms emphasised in the literature. But do these results carry over to a multilateral European reform? On a European scale, the beneficial effects of lower corporate tax rates are smaller. This is because tax rate reduction attracts fewer profits if all other European countries pursue the same policy such that only profit-shifting vis-à-vis tax havens outside the EU will be reduced. Similarly, the comparative location advantage of a country for profitable investments does not improve if all other member states reduce their tax rate too. Again, only location choices vis-àvis third countries like the United States and Japan will be improved. On balance, a multilateral 41
Page 1 and 2: The economic effects of EU-reforms
Page 3 and 4: Contents 1 Introduction 5 2 The COR
Page 5 and 6: 1 Introduction This report analyses
Page 7 and 8: Household optimization yields expre
Page 9 and 10: In today’s corporate tax regimes
Page 11 and 12: Yet, not all forms of profit shifti
Page 13 and 14: companies which report total assets
Page 15 and 16: 2.2.2.1 Corporate tax rates Figure
Page 17 and 18: Table 2.3 Summary information about
Page 19 and 20: 2.2 shows the average debt share pe
Page 21 and 22: Figure 2.4 Corporate tax revenue in
Page 23 and 24: countries (each point representing
Page 25 and 26: Figure 2.7 Reduced-form elasticitie
Page 27 and 28: Figure 2.9 Reduced-form elasticity
Page 29 and 30: 2.3 Interpretation of results CORTA
Page 31 and 32: structured discussion about both th
Page 33 and 34: There is a variety of combinations
Page 35 and 36: Table 3.2 shows the economic effect
Page 37 and 38: of the fixed factor is smaller. Acc
Page 39: Table 3.4 Economic effects for the
Page 43 and 44: shows the impact of the CCTB-WG20 r
Page 45 and 46: 4.1.2 A scenario without profit shi
Page 47 and 48: shifting within the EU (see section
Page 49 and 50: eturns are taxed immediately and al
Page 51 and 52: other hand, loss consolidation caus
Page 53 and 54: Figure 4.2 Welfare effects of selec
Page 55 and 56: asic version of CORTAX. Note, howev
Page 57 and 58: 5 European corporate income tax Thi
Page 59 and 60: 6 Conclusions We have analysed the
Page 61 and 62: Devereux, M.P. and S. Loretz, 2008a
Page 63 and 64: Appendix A Modelling firm behaviour
Page 65 and 66: c b ∂cb + dbt = r − rb + τRb (
Page 67 and 68: capital requires that the marginal
Page 69 and 70: − b Π t −1 = Yt −1 − wLt
Page 71 and 72: Substituting into the dividend equa
Page 73 and 74: Appendix A2 Country tables baseline
Page 75 and 76: Appendix B Country tables CCTB The
Page 77 and 78: Table B.2: CCTB-WG25 for all firms
Page 79 and 80: Table B.4: CCTB-WG20 for multinatio
Page 81 and 82: Table B.6: CCTB-EUav for multinatio
Page 83 and 84: Table B.8: CCTB-WG20 for multinatio
Page 85 and 86: Table B.10: CCTB-WG20 for multinati
Page 87 and 88: Table B.12: CCTB-WG25 for all firms
Page 89 and 90: Table B.14: CCTB-WG20 for multinati
Page 91 and 92:
Table B.16: CCTB-EUav for multinati
Page 93 and 94:
Table B.18: CCTB-WG20 for multinati
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Table B.20: CCTB-WG20, multinationa
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Table B.24: CCTB-WG25 for all firms
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Table B.28: CCTB-EUav for multinati
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Table C.1: CCCTB-WG20 for all firms
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Table C.3: CCCTB-EUav for all firms
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Table C.5: CCCTB-WG25 for multinati
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Table C.11: CCCTB-WG20 for all firm
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Table C.13: CCCTB-EUav for all firm
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Table C.15: CCCTB-WG25 for multinat
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Table C.21: Decomposition CCCTB-WG2
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Table C.23: Decomposition CCCTB-WG2
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Table C.33: CCCTB-EUav for multinat
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Table D.1: EUCIT-WG20 for all firms
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Table D.3: EUCIT-EUav for all firms
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Table D.5: EUCIT-WG25 for all firms
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The economic effects of EU-reforms in corporate income tax systems

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