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

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Π −δ −φ (A.4) t = Yt − wLt − dbt Rb Kt f Dt I t It consist of total revenue from sales minus labour costs, deductible financial costs and deductible depreciation allowances. The third term on the right-hand side of (A.4) reflects the deductible financial costs from investment. As shown by (A.4), it is the nominal interest payments on actual debt (d bt R b K t ) which are deductible from the corporate tax base, where R b = (1+r b )(1+π)-1 ≈ r + π is the nominal interest rate and π is the rate of inflation. Most corporate tax systems do not allow a deduction of the cost of equity, except for Belgium that introduced such a system in 2006. The last two terms on the right-hand side of (A.4) reflect fiscal depreciation. The fourth term is the annual rate of fiscal depreciation, equal to δ f , times the stock of fiscal depreciable assets, denoted by D t . The last term denotes the share of the investment that can be depreciated immediately after its purchase, measured by φ . Note thatφ = 1 would imply immediate expensing of investment. If φ = δ f , annual fiscal depreciation at rate δ f would start in the period of purchase, rather than one year after the purchase. Regarding economic and fiscal depreciation, we assume a declining balance at a rates of, respectively, δ and δ f . The accumulation of capital in, respectively, the firms financial accounts and its tax accounts is thus reflected by: K ) t+ 1 = It + (1 − δ Kt (A.5) ( 1 π ) D t 1 = (1 − φ) It + (1 − δ f ) Dt + + (A.6) where (A.6) takes into account that fiscal depreciation only applies to the share that is not immediately expensed, i.e. (1-φ ) and that the price of fiscal assets is not indexed for inflation. Firm behaviour is now derived from maximizing its value (A.2), subject to the accumulation equations (A.5) and (A.6): ∞ s−t + 1 ⎡ 1 ⎤ L = ∑ [ Divs − λ s+ 1[(1 + π ) Ds+ 1 − (1 −φ) Is − (1 − δ f ) Ds ] − µ s+ 1[ Ks+ 1 − Is − (1 − δ ) Ks ]] ⎢1 ⎥ = ⎣ + r s t ⎦ (A.7) where λ t is the Langrange multiplier for D t and µ t the Langrange multiplier for K t (Tobins q) and discounting occurs at the real rate r. We will now subsequently discuss the optimal choice regarding the financial structure and investment by the firm. Financial behaviour We first optimize (A.7) with respect to the debt share. This yields the following first-order condition: 64
c b ∂cb + dbt = r − rb + τRb (A.8) ∂d bt The left-hand side of (A.8) denotes the marginal cost of a higher debt share. High debt may be costly due to financial distress associated with a larger risk of bankruptcy or higher agency costs. In the optimum, the marginal cost of higher debt equal the marginal benefit reflected by the right-hand side of (A.8). This marginal benefit of debt finance is equal to the difference in the real required market cost of debt versus equity plus a tax term that reflects the favourable treatment of debt over equity. Hence, due to this discrimination of the corporate tax system in favour of debt, the corporate tax rate raises the relative benefits of debt finance. The benefits from debt finance on the right-hand side of (A.8) are independent of the debt share. To avoid a corner solution in which firms find it optimal to finance the entire capital stock with either debt or equity, we specify a convex cost function of holding debt. In particular, we use the following function for the cost of holding debt: cb χ = (1+ ε d b ) (1−ε b d b ) (1 − b ) cb0 − db (A.9) so that ∂cb ⎡ db − ε b ⎤ cb0 c b + db = ⎢ ⎥( cb + ) ∂d b ⎣ 1− db ⎦ db (A.10) As long as the debt share exceeds ε b , expression (A.10) suggests that the marginal cost of holding debt is positive. The marginal costs tend to rise in the debt share and fall in the parameters χ and ε b . Hence, the higher the initial leverage of the firm, the more costly it is to further raise the share of debt finance. The parameters χ and ε b are set at levels so as to replicate the elasticity of the debt share found in empirical studies. Investment behaviour To find optimal investment, we specify the production function Y t = CES (K t , L t ) as a constant elasticity of substitution function with capital and labour as inputs. Production features decreasing returns to scale with respect to these to inputs. Thus, a fixed factor is at the background, which earns an economic rent in production. In optimizing its value, the firm determines the optimal demand for labour and investment. Labour demand is determined by setting the value of the marginal product of labour equal to the before-tax wage rate. Below, we concentrate on the demand for investment. Denote the marginal product of capital as Y K . The first-order conditions for investment I t , and the stock variables D t and K t read as follows: 65
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 and 40: Table 3.4 Economic effects for the
Page 41 and 42: Table 3.5 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: Appendix A Modelling firm behaviour
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 91 and 92: Table B.16: CCTB-EUav for multinati
Page 95 and 96: Table B.20: CCTB-WG20, multinationa
Page 103 and 104: Table B.28: CCTB-EUav for multinati
Page 105 and 106: Table C.1: CCCTB-WG20 for all firms
Page 107 and 108: Table C.3: CCCTB-EUav for all firms
Page 109 and 110: Table C.5: CCCTB-WG25 for multinati
Page 115 and 116:
Table C.11: CCCTB-WG20 for all firm
Page 117 and 118:
Table C.13: CCCTB-EUav for all firm
Page 119 and 120:
Table C.15: CCCTB-WG25 for multinat
Page 121 and 122:
Page 123 and 124:
Page 125 and 126:
Table C.21: Decomposition CCCTB-WG2
Page 127 and 128:
Table C.23: Decomposition CCCTB-WG2
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Page 131 and 132:
Page 133 and 134:
Page 135 and 136:
Page 137 and 138:
Table C.33: CCCTB-EUav for multinat
Page 139 and 140:
Page 141 and 142:
Page 143 and 144:
Table D.1: EUCIT-WG20 for all firms
Page 145 and 146:
Table D.3: EUCIT-EUav for all firms
Page 147 and 148:
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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