Business Tax Rates Research Articles

The Impact of Tax Rates on Economic Growth of Iran in the Years 1981-2010

Several studies have shown that the country economy is based on oil and fossil fuel based, very vulnerable to factors such as war and sanctions. In recent years the Iranian government is trying to reduce dependence on oil and expanding the tax revenue. In this study the use of tax revenues, the effect of three types of tax rates including corporate tax rate, business tax rate and indirect taxes rate (each share of taxes in GDP) on economic growth in Iran during the Thirty Years' 1981-2010 with using of Auto Regressive Distributed Lags (ARDL) examined. In addition to these three variables, other variables such as annual population growth rate, inflation rate and degree of trade openness on economic growth is examined. The results suggest that the impact of the increase in the rates of these three types of taxes on economic growth is negative and significant, and for an increase in the rate of corporate tax rate, business tax rate and indirect taxes rate by 2/4 and 2/8 and 1/8 of economic growth is reduced. The results also reflect the positive impact of population growth rate, trade openness rate and the negative impact of inflation rate on economic growth in Iran.

Tax Mandates and Factor Input Use: Theory and Evidence from Italy

This paper investigates theoretically and empirically the consequences of state fiscal mandates for financially distressed regions concerning the use of factor inputs (labor, capital, and energy) in local production processes. I exploit the switch from systematic state bailout of regional deficits to selectively mandated hikes in regions´ own business tax rates that took place in Italy around the mid 2000s, to identify the effects of tax policy on the regional economy. The estimation results reveal that mandated business tax increases stimulate energy use and hamper the employment of human resources in science and technology occupations.

SPATIAL ADMINISTRATIVE STRUCTURE AND INTRA‐METROPOLITAN TAX COMPETITION

ABSTRACTI investigate whether the spatial administrative structure of agglomerations is associated with local business tax rates in core cities of agglomerations. Using data for German municipalities, I define agglomerations based on distances and based on cumulative population densities. The results show that the population share of the core in its agglomeration is positively associated and the number of surrounding municipalities is negatively associated with the tax rate of the core. When municipalities consolidate, the core has the opportunity to increase the tax rate.

Do Corporate Tax Cuts Reduce International Profit Shifting?

This paper analyzes whether a corporate tax cut reduces profit shifting to low-tax countries. I use firm-level data of 2,812 German corporations around the Business Tax Reform in 2008.Applying a difference-in-differences framework with a one-on-one matching strategy, which compares earnings of multinational and domestic corporations, I do not find empirical evidence that even a 10 percentage points cut in the business tax rate leads to a reduction of profit shifting activities.

Business taxes and the electoral cycle

The purpose of this paper is to assess whether the timing of elections affects tax policy choices. To do so, we exploit information on the German local business tax which is set autonomously by German municipalities. As the dates for local council elections vary across German states, the data allows us to disentangle effects related to the timing of elections from common trends. The findings support the notion of a political cycle in tax setting as the growth in local business tax rates is significantly reduced in the election year and the year prior to the election, while it significantly increases in the year after the election. This pattern turns out to be robust against a number of sensitivity checks.

Does Fiscal Cooperation Increase Local Tax Rates in Urban Areas?

Charlot S., Paty S. and Piguet V. Does fiscal cooperation increase local tax rates in urban areas?, Regional Studies. The main purpose of this paper is to assess the effects of fiscal cooperation on local taxation in a decentralized country using experience in French urban municipalities. A tax-setting model for local business tax is estimated, using spatial and panel econometric techniques, for the period 1993–2003. Controlling for population size, it is found that fiscal cooperation is likely to reduce tax competition and, as a consequence, to increase local business tax rates.

The Tax-Rate Elasticity of Local Business Profits

Local business profits respond to local business tax (LBT) rates that vary across municipalities. We estimate that a one percent increase in the LBT rate decreases the LBT base by 0.45 percent, based on the universe of German LBT return files, which include corporations and unincorporated businesses. However, the fiscal equalization scheme largely compensates municipalities for the loss in the LBT base when they increase the LBT rate. Our estimates suggest that using taxrevenue data instead of tax return data, as commonly done in the literature, results in a significant bias of the elasticity away from zero.

How low business tax rates attract MNE activity: Municipality-level evidence from Germany

Most existing empirical evidences on the impact of profit taxation on multinational firm activity are based on cross-country data. One major drawback of such data is that countries differ not only with regard to taxes but also with other dimensions which might be hard to capture by means of observable characteristics. We compile a database of more than 11,000 municipalities in Germany to analyze the sensitivity of location decisions of foreign MNEs in Germany with respect to business tax rates which are levied directly by the municipalities. We find that higher business tax rates have a negative effect on three alternative measures of MNE activity, after controlling for other determinants of firm location decisions: the number of foreign MNEs, MNE employment, and MNE fixed assets. Our results suggest that tax competition among regional entities for foreign investors is a game of a few. In cross-section instrumental-variable regressions, a one-percent reduction of the municipal business tax rate (equivalent to a decline by about 0.14 percentage points) leads to an increase in the number of legally independent foreign-owned firms by about 0.45. The average municipality would have to reduce its business tax rate by about 2.2 percentage points (or 15%) from its average level to attract one foreign MNE. Hence, municipalities need to be attractive in other dimensions to be able to use tax instruments to attract foreign firms at the margin.

Strategic fiscal interaction across borders: Evidence from French and German local governments along the Rhine Valley

This article contributes to the literature on local tax interactions. Its novelty lies in its focus on the interactions of local governments across national borders. We use panel data for the French and German municipalities in the Rhine Valley for the period 2000–2007. The local governments of each country influence firms’ overall tax burdens, but the tax instruments available at the local level differ. We estimate panel models that distinguish between the effects of competing municipalities belonging to the same country and belonging to the other country. Our empirical model shows that local jurisdictions along borders choose their business tax rates based on those of their domestic neighbors and that foreign fiscal policy does not have an impact on the local domestic tax setting behavior in these contexts.

Does Fiscal Coopération Increase Local Tax Rates in Urban Areas?

The main purpose of this paper is to assess the effects of fiscal cooperation on local taxation in a decentralized country, using the French experience in urban municipalities. We estimate a model of tax setting for local business tax using spatial and dynamic econometric techniques, for the period 1993-2003 and an unbalanced data set. As predicted by the theory, we find that reducing the number of municipalities is likely to limit tax competition and, as a consequence, increase local business tax rates.

Fiscal competition over taxes and public inputs

Governments are widely perceived as competing for capital by choosing parameters in a multi-dimensional policy space. We consider the choice of a business tax rate as well as a productive public input by local governments and estimate a model of strategic interaction in both policy instruments. The estimations suggest that local governments use both the business tax rate and public inputs to compete for capital. We find that if neighbors cut their tax rates, governments try to restore competitiveness by lowering their own tax and increasing public inputs. If neighbors provide more infrastructure, governments react by increasing their own spending.

Is agglomeration taxable?

Several theoretical papers that examine tax competition with agglomeration effects have stressed the possibility that the governments of jurisdictions in which economic activity is concentrated may tax firms more heavily (taxable agglomeration rents). In this article, we examine the tax rate setting decisions taken with regard to the Spanish municipal business tax (Impuesto sobre Actividades Económicas). The analysis, carried out with a large sample of Spanish municipalities, focuses on the effect that urbanization economies and localization economies have on their business tax rates. High urbanization economies and localization economies are found to increase the business tax rate.

Do fiscal transfers alleviate business tax competition? Evidence from Germany

According to theory, capacity equalization grants cause local governments to internalize the effects of their tax policies on revenues of neighboring jurisdictions and so raise equilibrium tax rates. This paper empirically analyzes the incentive effects of equalizing transfers on business tax policy by exploiting a natural experiment in the state of Lower Saxony which changed its equalization formula as of 1999. We resort to within-state and across-state difference-in-difference estimates to identify the reform effect on municipalities' business tax rates. Confirming the theoretical prediction, the reform had a significant impact on the municipalities' tax policy in the 4 years after the reform with the effect stabilizing in the fourth to fifth years. The finding is robust to various alternative specifications.

How Low Business Tax Rates Attract Multinational Headquarters: Municipality-Level Evidence from Germany

Most existing empirical evidence on the impact of profit taxation on multinational firm activity is based on cross-country data. One major drawback of such data is that countries differ not only with regard to taxes but along other dimensions which might be hard to capture by means of observable characteristics. We compile a database of more than 11,000 municipalities in Germany to analyze the sensitivity of the location decisions of foreign MNEs with respect to business tax rates which are levied directly by the municipalities. Using count data models suited for cross-sectional and panel data, we find that higher business tax rates have a negative effect on the number of foreign MNE headquarters, after controlling for other determinants of firm location decisions. On average, a one-percent reduction of the municipal business tax rate (equivalent to a decline by about 0.14 percentage points) leads to an increase in the number of headquarters of foreign MNEs by about 0.05. Hence, the average municipality needs to reduce its business tax rate by 20% to attract one foreign MNE.

Fiscal Competition over Taxes and Public Inputs: Theory and Evidence

We set up a model to characterize the reaction functions of governments competing for mobile capital by simultaneously setting both the business tax rate as well as the level of provision of a productive public input. Using a rich data set of local jurisdictions, we then test the predictions of the model with respect to the nature of strategic interaction among governments. Our findings from efficient estimation of a system of spatially interrelated equations for both policy instruments support the notion that local governments use both the business tax rate and public inputs to compete for capital. In particular, we find that if neighbors cut their tax rates, governments try to restore competitiveness by lowering their own tax and increasing spending on public inputs. If neighbors provide more infrastructure, governments react by increasing their own spending on public inputs.

The Place of Religion in Devolved Scottish Politics: An Interest Group Analysis of the Church of Scotland and Scottish Catholic Church

On the 6 September 2005, Jack McConnell unveiled the Scottish Executive's new nineteen month long legislative programme. A wide-ranging agenda, it promised, amongst other things, a cut in business tax rates, the introduction of a greater range of sentencing options for courts as part of a general crackdown on public order, and the abolition of school boards. Similar policy themes were evident in the 2004 programme, when Mr McConnell labelled the Executive's proposals 'modern laws for a modern Scotland'. However, the piece of legislation which many commentators chose to focus on was the plan to bring Scottish family law into line with England and allow same-sex, unmarried couples to adopt. More than five years on from 'Section 28*, the Scottish Executive was once again preparing to tackle a controversial 'moral' issue which would inevitably bring it into conflict with significant sections of Scottish society and, in particular, the Scottish churches.

Analyzing the Interdependence of Regulation and Taxation

This article draws attention to the interdependence of regulation and taxation. The authors analyze the nature of policy equilibrium, as well as the implications of historically important political and economic shocks, for the joint use of the two policy instruments in a framework that embodies relationships common in the literature. Regulation is represented by barriers to entry created by the government for favored industries. Among the results are the following: the introduction of new methods of communication in politics, such as television advertising, leads to increased taxation of the average voter, lower business tax rates, greater entry barriers in private markets, and greater resource use for campaign advertising, with the marginal cost of the new medium and the elasticity of supply in regulated industries playing crucial roles. Budgetary government size declines. The two additional shocks analyzed, namely, growth in the labor force participation of women and increased offshore production also have substantial consequences for tax rates as well as regulation. The article concludes with a consideration of the efficiency of policy equilibrium and the analytical problems that arise in evaluating efficiency in such a context.

The incentive effect of fiscal equalization transfers on tax policy

A theoretical analysis considers the impact of a typical system of redistributive “fiscal equalization” transfers on the tax effort of local jurisdictions. More specifically, it shows that the marginal contribution rate, i.e. the rate at which an increase in the tax base reduces those transfers, might be positively associated with the local tax rate while the volume of grants received is likely to be inversely related to the tax rate. These predictions are tested in an empirical analysis of the tax policy of German municipalities. In order to identify the incentive effect the analysis exploits discontinuities in the rules of the fiscal equalization system as well as policy changes. The empirical results support the existence of an incentive effect, suggesting that the high marginal contribution rates induce the municipalities to set significantly higher business tax rates compared with a situation without fiscal equalization.

The Incentive Effect of Fiscal Equalization Transfers on Tax Policy

A theoretical analysis considers the impact of a typical system of redistributive transfers on the taxing effort of local jurisdictions. More specifically, it shows that the marginal contribution rate, i.e. the rate at which an increase in the tax base reduces those transfers, might be positively associated with the local tax rate while the volume of grants received is likely to be inversely related to the tax base. These predictions are tested in an empirical analysis of the tax policy of German municipalities. In order to identify the incentive effect the analysis exploits discontinuities in the rules of the fiscal equalization system as well as policy changes. The empirical results support the existence of an incentive effect, suggesting that the high marginal contribution rates induce the municipalities to raise their business tax rates significantly.

Regulation and Taxation: Analyzing Policy Interdependence

The paper draws attention to the interdependence of regulation and taxation. We analyze the nature of policy equilibrium, as well as the implications of historically important political and economic shocks, for the joint use of the two policy instruments in a framework that embodies relationships common in the literature on political economy. Regulation is represented by barriers to entry created by the government for favored industries. Among the results are the following: the introduction of new methods of communication in politics, such as television advertising, leads to increased taxation of the average voter, lower business tax rates, greater entry barriers in private markets and greater resource use for campaign advertising, with the marginal cost of the new medium and the elasticity of supply in regulated industries playing crucial roles. Overall government size declines. The two additional shocks analyzed, namely growth in the labor force participation of women and increased off-shore production also have substantial consequences for tax rates as well as regulation. The paper concludes with a consideration of the efficiency of policy equilibrium and the analytical problems that arise in evaluating efficiency in such a context.