Corporate Income Tax Reform Research Articles

Earnings management around Swedish corporate income tax reforms

Prior literature considers a change in the national corporate income tax (CIT) rate as a strong firm incentive to manage earnings. This article examines the link between two recent CIT reforms in Sweden and earnings management with a large dataset of private firms. The effects of tax rate cuts are estimated on aggregate measures as well as on decomposed measures of accrual-based earnings management. The results suggest that taxation clearly influences these firms in their high book-tax conformity setting. Downward earnings management is documented before the reduction in the CIT rate, consistent with research on public firms with lower book-tax conformity. Primarily accounts receivable is noted to drive these results. Weaker evidence is provided with the inventory and depreciation accrual vehicles. The tax effects are statistically and economically significant. Furthermore, the income-decreasing behaviour prior to the CIT reforms is observed to be persistent over time.

The Distinct Advantages of a Sales-Apportioned Corporate Cash Flow Tax

This paper explores the impacts of adopting two corporate income tax reforms simultaneously: the conversion to a cash-flow tax, that would allow the expensing of investment while disallowing interest deductions, and the switch to sales-based formula apportionment, that would tax worldwide profits in proportion to domestic sales revenue. I find that the two reforms are complementary, each eliminating different distortionary impacts of the corporate income tax. Worldwide adoption of both reforms would result in the taxation of supernormal profits with only minimal tax distortions.However, just as multinational corporations can easily manipulate separate accounting to minimize tax burdens, by shifting profits across national boundaries, sales-formula-apportionment is also potentially vulnerable to tax avoidance, through shifting profits across industry boundaries. Thus, the attractiveness of the combined reform probably hinges on how well sales-formula-apportionment’s natural boundaries, between unrelated economic activities, can be established and maintained.

ВЛИЯНИЕ КОРПОРАТИВНОГО НАЛОГА НА ПРИБЫЛЬ И УРОВНЯ МАРКЕТИЗАЦИИ НА СТРУКТУРУ КАПИТАЛА ПУБЛИЧНЫХ КОМПАНИЙ КИТАЯ

Using the 2008 corporate income tax reform as an opportunity, this paper constructs a Panel DID model to study the effect of corporate income tax and the degree of marketization on capital structure. Based on the 2008 Enterprise Income Tax Reform in China, accompanying with both rise and fall in the tax rate, the paper tests the adaptability of the Modigliani & Miller theory, and develops a capital structure theory in the context of China. Author’s used the financial data of 206 Chinese listed companies from 2002 to 2012. The financial data of listed companies were mainly taken from Xenophon database and GuoTaian database. The marketization index data were obtained from The Marketization Index in China: 2011 Report for the Relative Marketization Process in Various Regions. Industries was classified according to the Global Industry Classification Standard (GICS) and test the sensitivity of the capital structure to exogenous corporate tax rate change in different industries. The empirical results show that: firstly, the higher the degree of marketization is, the more significant the tax shield effect is; secondly, compared to the corporate income tax, differences in the degree of marketization exert a more significant effect on the corporate capital structure; thirdly, because of the long existence of tax incentives, debt tax shield is not significant in people’s livelihood industries and information technology industry; Fourthly, given the upward trend in the overall asset-liability ratio of Chinese companies, in order to control companies’ financial risk, we recommend to foster market reform and the use corporate income tax incentives where necessary. The results of research will provide a reference for future marketization reform and tax policies in different industries in China.

Tax reforms and the capital structure of banks

The paper studies the link between corporate income tax reforms and domestic bank entities' financing decisions. We use a dataset of corporate income tax (CIT) reforms and estimate the effect of tax rate changes on leverage, dividend policies and earnings management of banks using BankScope (Orbis) data. Our results suggest that taxation influences all three variables in the first three years after the reform. Leverage increases with the CIT rate. The reason is that the statutory CIT rate determines the value of the debt tax shield. A higher tax rate increases incentives to use debt finance when interest payments are deductible from the CIT base. Also, dividend pay-outs increase after an increase of CIT rates. This could indicate that banks actively manage their pay-out policies around tax reforms and adjust their capital structure with changes in dividends. Furthermore, banks increase loss loan reserves in anticipation of a tax rate cuts since losses become less valuable with lower CIT rates. In the context of the current regulatory reform in the financial sector which focuses strongly on improving equity ratios of banks, our results suggest that future tax policies should focus on eliminating the favorable treatment of debt in general and for banks in particular. The reason is that this distortion at least partly undermines the regulatory objectives of increasing (regulatory) capital.

Structural Confinement vs. Policy Choices: The Ideological and Competitive Causes of Corporate Income Tax Reform

The Asset Mobility Model (AMM) represents one of the most important theoretical models developed to explain the strategic response of states to the modifications of tax policies in other states. One of the most significant predictions derived from the AMM is the “race to the bottom” in the area of Corporate Income Taxation, race that should take place within the wider context of the globalization. According to this model, the state’s capacity to tax various entities from the territory it controls is a function of the mobility of these entities. This paper analyzes the logic of causality advanced by the AMM and the strengths and limitations of this model in studying the evolution of Corporate Income Taxation in the post-communist countries. I investigate the degree to which tax policy changes that might appear to be explained through the AMM cannot be better explained as motivated by ideological or other policy goals.

Japan’s Corporate Income Tax: Facts, Issues and Reform Options

This paper explores how corporate income tax reform can help Japan increase investment and boost potential growth. Using international and Japan-specific empirical estimates of corporate tax elasticities, investment is predicted to expand by around 0.4 percent for each point of rate reduction. International consensus estimates suggest further that between 10 and 30 percent of the static revenue loss could be recovered in the long run through dynamic scoring, although Japan’s offset may be closer to the lower bound. Compensating fiscal measures are necessary in light of Japan’s tight fiscal constraints. The scope for base broadening in the corporate income tax is found to be limited and some forms of base broadening will undo positive investment effects of a rate cut. Alternative revenue sources include higher consumption and property taxes. A gradual approach toward lowering tax rates mitigates windfall gains and reduces short-run revenue costs. An incremental allowance-for-corporate-equity system could boost investment with limited fiscal costs in the short run.

Japan's Corporate Income Tax: Facts, Issues and Reform Options

This paper explores how corporate income tax reform can help Japan increase investment and boost potential growth. Using international and Japan-specific empirical estimates of corporate tax elasticities, investment is predicted to expand by around 0.4 percent for each point of rate reduction. International consensus estimates suggest further that between 10 and 30 percent of the static revenue loss could be recovered in the long run through dynamic scoring, although Japan’s offset may be closer to the lower bound. Compensating fiscal measures are necessary in light of Japan’s tight fiscal constraints. The scope for base broadening in the corporate income tax is found to be limited and some forms of base broadening will undo positive investment effects of a rate cut. Alternative revenue sources include higher consumption and property taxes. A gradual approach toward lowering tax rates mitigates windfall gains and reduces short-run revenue costs. An incremental allowance-for-corporate-equity system could boost investment with limited fiscal costs in the short run.

Tax Reforms and the Capital Structure of Banks

The paper studies the link between corporate income tax reforms and domestic bank entities' financing decisions. We use a dataset of corporate income tax (CIT) reforms and estimate the effect of tax rate changes on leverage, dividend policies and earnings management of banks using BankScope (Orbis) data. Our results suggest that taxation influences all three variables in the first three years after the reform. Leverage increases with the CIT rate. The reason is that the statutory CIT rate determines the value of the debt tax shield. A higher tax rate increases incentives to use debt finance when interest payments are deductible from the CIT base. Also, dividend pay-outs increase after an increase of CIT rates. This could indicate that banks actively manage their pay-out policies around tax reforms and adjust their capital structure with changes in dividends. Furthermore, banks increase loss loan reserves in anticipation of a tax rate cuts since losses become less valuable with lower CIT rates. In the context of the current regulatory reform in the financial sector which focuses strongly on improving equity ratios of banks, our results suggest that future tax policies should focus on eliminating the favorable treatment of debt in general and for banks in particular. The reason is that this distortion at least partly undermines the regulatory objectives of increasing (regulatory) capital.

Investment Decisions under a Dual Tax System

This paper develops a theoretical model with a dual tax system that provides preferential treatments for foreign investment. The study suggests that in order to benefit from the preferential tax incentives and gain better property rights, high-productivity domestic firms intend to disguise as foreign firms via a practice of round-tripping. These preferential policies not only lead to government revenue losses; they also impose a higher tax rate on low-productivity and small firms. In addition, the study uses numerical simulation techniques to illustrate the impact of China’s corporate income tax reforms in 2008. We find that China’s domestic investment could decrease along with FDI under the unified system, though the tax rate on domestic firms falls.

Gross Profit Taxation Versus Distributed Profit Taxation and Firm Performance: Effects of Estonia’s Corporate Income Tax Reform

Systems of profit taxation are undergoing continuous change and are subject to numerous studies. This paper estimates the effect of the corporate tax reform in Estonia in the year 2000, a reform that was unique anywhere. This reform nullified the taxation of retained earnings and retained the corporate income tax only on distributed profits. We estimate the effect of the reform on firms’ capital structure, liquidity, investments and productivity. The effect of the reform is identified by comparing the performance of Estonian firms that were affected with that of firms from Latvia and Lithuania, the two other Baltic states, which are economically fairly similar to Estonia and have correlated business cycles. We use firm-level financial data and the difference in differences and propensity score matching methods for our analysis. The results show that the corporate tax reform has resulted in increased holdings of liquid assets and lower use of debt financing; these results can be seen especially among the smaller companies affected by the liquidity constraints. These developments have contributed positively to firms’ survival during the recent global economic crisis. A positive effect on investment and labour productivity has also been found, especially among companies in the services sector. The results imply that distributed profit taxation schemes may have significant positive effects on economic development and firms’ survival.

The Expected Revenue Loss from a Corporate Tax Which is Neutral with Respect to Financing Decisions (Was Kostet Eine Finanzierungsneutrale Besteuerung Von Kapitalgesellschaften?) (German)

An Estimation of the Revenue Loss from Introducing a Notional Interest Deduction on Nominal Capital into the German Corporate Tax. Capital income taxation in Germany distorts financing decisions of corporations as the after-tax cost of capital for equity is considerably higher than for debt. Since 2006 the German Council of Economic Experts has been proposing a neutral tax system similar to the Norwegian shareholder ACE tax. In the last German corporate and personal income tax reform in 2008/09 this proposal has not been realized because revenue losses were expected to be unacceptably high. In this paper we estimate the expected tax revenue losses of an alternative concept which also ensures neutrality with respect to financing decisions: a notional interest deduction on nominal capital and capital reserve. Data from the official German corporate income tax statistics are used. We show that revenue losses are relatively small.

Anticipating Tax Changes: Evidence from the Finnish Corporate Income Tax Reform of 2005*

AbstractUsing register‐based panel data covering all Finnish firms from 1999 to 2004, we examine how corporations anticipated the 2005 dividend tax increase via changes in their dividend and investment policies. The Finnish capital and corporate income tax reform of 2005 creates a useful opportunity to measure this behaviour, since it involves exogenous variation in the tax treatment of different types of firms. The estimation results reveal that those firms that anticipated a dividend tax hike increased their dividend payouts in a statistically significant way. This increase was not accompanied by a reduction in investment activities, but rather was associated with increased indebtedness in non‐listed firms. The results also suggest that the timing of dividend distributions probably offsets much of the potential for increased dividend tax revenue following the reform.

Anticipating Tax Change: Evidence from the Finnish Corporate Income Tax Reform of 2005

Anticipating Tax Change: Evidence from the Finnish Corporate Income Tax Reform of 2005

Corporate Income Tax Reform: The Neglected Issue of Tax Incidence

The ‘double taxation’ of corporate income is often used as an argument in support of the integration of company and shareholder taxes, as occurred with the introduction of tax imputation in 1987 in Australia. These arguments are based, often implicitly, on the premise that the economic incidence of company taxes falls on shareholders receiving dividend income. However, a review of the available theoretical and empirical literature fails to provide an unambiguous answer to the corporate income tax incidence question. Empirical results presented in this paper suggest the existence of significant forward shifting of the tax on to consumers though higher prices in the case of Australian manufacturing corporations. A more informed discussion of tax reform must therefore consider more carefully the implications arising from the likely existence of significant forward shifting of the corporate income tax.

Corporate Income Tax Reform in Switzerland

This paper analyzes the likely economic consequences of a specific proposal for corporate income tax reform in Switzerland that is based on the recent ERU (2001) report. The proposal includes a partial dividend tax relief, more effective taxation of capital gains, and a property tax reduction, all relating to qualified stakes in corporate firms. Based on an analytical and quantitative analysis, we find that the reform removes an important tax barrier against dividend payments, reduces the cost of equity capital, thereby reduces debt leverage and encourages investment in the corporate sector. In stimulating transitional growth towards higher long-run income levels, the reform expands tax bases and thereby becomes considerably less costly in the long-run. A sensitivity analysis shows that the quantitative results are rather robust.

Corporate income tax reforms and international tax competition

Corporate income tax Reforms and tax competition This paper analyses the development of taxes on corporate income in EU and G7 countries over the last two decades. We establish a number of stylized facts about their development. Tax-cutting and base-broadening reforms have had the effect that, on average across EU and G7 countries, effective tax rates on marginal investment have remained fairly stable, but those on more profitable investments have fallen. We discuss two possible explanations of these stylized facts arising from alternative forms of tax competition. First, governments may be responding to a fall in the cost of income shifting, which puts downward pressure on the statutory tax rate. Second, reforms are consistent with competition for more profitable projects, in particular those earned by multinational firms. Michael Devereux, Rachel Griffith and Alexander Klemm

Die deutsche Steuerbelastung im internationalen Vergleich: Warum Deutschland (k)eine Steuerreform braucht

Abstract This paper attacks the widespread view that the latest (corporate) income tax reform in Germany was urgently needed to reduce the tax burden on the German economy. In the run-up to this tax reform, the public debate focused on nominal income tax rates and hence neglected the determination of the tax base. Empirical results on effective tax burdens in OECD countries show that a reform of German (corporate) capital taxation cannot be justified on the grounds of the tax burden. The international comparison of effective average tax rates shows that the corporate tax burden in Germany steadily declined from 1980 and was in 1996 lower than in most other industrialised countries. However, we argue that not only the actual tax burden but also the complexity of a tax system determines its international competitiveness. A German tax reform was - and still is - necessary due to the lasting complexity of the tax system and the relatively high tax burden on labour.

The Finnish Corporate Income Tax Reform and the Financial Strategy of Firms: A General Equilibrium Approach

This paper simulates the effects of the recent Finnish corporate tax reform with a computable general equilibrium model. It shows that the impact of the reform on the capital stock depends on the reactions of firms. If the financial strategy is changed to prefer dividend distribution and share issues, the cost of capital falls and the capital stock increases. On the other hand, if the criterion of financial policy is to minimise the welfare loss of current shareholders, the earlier financial behaviour should be continued. In that case,the induced higher cost of capital leads to a lower capital stock. The overall welfare evaluation of the tax reform is not sensitive to the regime shift: the reform should not have been implemented. This is because the increase in interest income taxation distorts saving decisions, expands the net foreign debt of the economy and weakens the terms of trade.

German Tax Reform – An International Perspective

Ulrich Schreiber discusses the economic and legal aspects of the corporate income tax reform and considers its effects for both inbound and outbound foreign investment. With respect to the latter, the reform makes foreign equity financed investment more attractive. At the same time, it may increase Germany's attractiveness for equity financed inbound investment.

Corporate Income Tax Reform in the United States: Proposals for Integration of the Corporate and Individual Income Taxes, and International Aspects

Corporate Income Tax Reform in the United States: Proposals for Integration of the Corporate and Individual Income Taxes, and International Aspects