Corporation tax asymmetries: effective tax rates and profit shifting

Abstract

This paper examines the way in which the asymmetric treatment of losses within corporate tax codes can be expected to affect behavioural responses to changes in tax rates. The paper uses the concept of an equivalent tax function, raising the same present value of tax payments as the actual function, in which the effective rate on losses in any period, and thus the degree of asymmetry, is explicit. The influence on the elasticity of tax revenue with respect to the tax rate of this effective rate is then examined, where ‘loss-shifting’ occurs. Results suggest that estimates of the behavioural effect on tax revenues of changes in tax rates can be expected in general to be smaller in regimes which involve greater asymmetries in the tax treatment of losses. Importantly, as losses vary over the economic cycle, the model predicts that the asymmetric tax treatment generates effects on tax revenues that are non-linear between above-trend and below-trend parts of the cycle.