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

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
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