Corporate Profit Tax Research Articles

The Impact of Taxes on Competition for CEOs

This paper contributes to the question of how taxation of corporate profits and wages affects competition among firms for highly skilled human resources such as CEOs. Use of a theoretical model shows that wage taxes can have a substantial impact on the outcome of such a competition if marginal tax rates are different as in an international labor market. Further, the paper shows that increasing the wage tax rate unilaterally can have an ambiguous effect on observed gross compensation levels. However, in a local labor market for CEOs, observed gross fixed salaries should decline in the wage tax rate. Tax effects in a market for CEOs is a particularly interesting topic because recent developments with respect to compensation practices of top-level managers have opened a public debate about the use of instruments for regulating compensation of those managers. Furthermore, many countries around the world use tax incentives in order to facilitate immigration of highly skilled human resources. The investigation follows an analytical economics-based approach by extending an LEN model with elements of competition for scarce human resources and income taxation. It investigates the impact of differential taxation on the competition between two firms for the exclusive service of a unique, highly skilled CEO.

The Review of Legislative Initiatives as Regards Taxation Issues in Q2 2016

In April–June 2016, lots of proposals on taxation in Russia were developed. The attention was focused on all the main taxes, including the individual income tax, corporate profit tax, property taxes, including the transport tax, the severance tax and the gambling tax. Also, a decision was approved to expand access of small business entities to the simplified scheme of taxa on. However, the reform of the system of administration on of insurance contributions to the mandatory social insurance should be recognized as one of the most fundamental and large-scale changes.

Monitoring of Global Experience of Consolidated Taxation

In foreign practice, one of the means of fighting with evasion from taxation of interconnected corporations is special regimes of their taxation. Consolidation supposes unification of several interconnected organizations into one taxpayer – however, it should be noted that consolidation is possible only with several kinds of taxes: corporate profit tax, value added tax, and sometimes excises and other taxes. This regime is aimed at unification of tax administration and change of the order of distribution of tax income from their activities between territorial entities. The purpose of the article is to conduct monitoring of the global practice of taxation of consolidated taxpayers, which is caused by significant drawbacks of Russian regime of consolidated taxation which have already shown themselves during a 3-year practice of its use. Special attention is paid to foreign practice of requirements to participation interest of parent company in the capital of subsidiary company, way of regime selection, possibility of participation for non-resident company, and taxes, for calculation and payment of which unification is allowed. The results of the research allowed developing classification of tax consolidation, within such classification features as subjects of consolidation, legislative consolidation, methods of creation, and taxes which are the object of consolidation. Based on the analysis of historical preconditions for emergence of consolidated groups of taxpayers, three stages of emergence of this institute were determined – period of appearance, fledging period, and period of development. During study of foreign practice of unification of companies into consolidated groups for the purpose of calculation of taxes, similarities and differences of regimes in Russia and foreign countries were revealed. DOI: 10.5901/mjss.2016.v7n1p410

Delineation of Powers between the Federal and Regional Levels of Power in the Field of Tax Relieves: Fiscal Consequences

The article's objective is the research of delineation of tax powers with regard to stating tax preferences in the Russian Federation and their influence on the nature of tax competition and the consequences for budgets. It emphasizes that no analysis of the fiscal effect of tax preferences and control of the shortfall in tax revenues of the budget is performed on the government level. It is partially related to the unsolved state of the problem of tax relieves identification. It shows that the adopted in Russia mechanism of granting tax relieves for the regional corporate property tax includes excessive government control on the federal level, which incurs reduction of the level of vertical tax competition. As a result of such distortion, a shortfall in revenues of regional budgets emerges. Assessment of such revenues is neither made by the federal authorities nor by the regional are ones; and the respective losses of regional budgets not compensated by the federal budget. Through the example of the corporate property tax, it is illustrated that the main part of the shortfall in revenues relates to the preferences provided at the federal level. It is also revealed that the establishment of the institution of a consolidated group of taxpayers in the Russian Federation since 2012 had adverse impact on the powers of the regions of the Russian Federation in terms of their administration of the tax base of the territory. The distortion of the horizontal tax competition between regions for the taxpayer took place, as within a consolidated group of taxpayers, the net financial result of the group members suffers the tax, which contributes to erosion of the tax base (Base Erosion) with regard to the corporate profit tax. As a result, the amount of tax revenues to the regional budget does not depend on the actual contribution of each region to creation of favorable tax climate for investors.

Should tax policy favor high- or low-productivity firms?

Heterogeneous firm productivity raises the question of whether governments should pursue ‘pick-the-winner’ strategies by subsidizing highly productive firms more (or taxing them less) than their less productive counterparts. We study this issue in a setting where governments can set differentiated effective tax rates in an oligopolistic industry in which firms with two productivity levels co-exist. We show that the optimal structure of tax differentiation depends critically on the feasible level of the corporate profit tax, which in turn depends on the degree of international tax competition. When tax competition is weak and optimal profit tax rates are high, favoring high-productivity firms is indeed the optimal policy. When tax competition is aggressive and profit taxes are low, however, the optimal tax policy reverses and favors low-productivity firms.

Unobserved tax avoidance and the tax elasticity of FDI

This paper investigates the tax responsiveness of multinational firms’ investment decisions in foreign countries, distinguishing firms that are able to avoid taxes (avoiders) from those that are not (non-avoiders). From a theoretical point of view, the tax responsiveness of firms crucially depends on this distinction. Empirically, however, a firm's ability to avoid profit taxes is inherently unobservable to the researcher. To address this problem, we use a finite mixture modeling approach which allows us to distinguish avoiders from non-avoiders stochastically from a mixture of distributions of the two types of firms. Using panel data on the universe of foreign affiliates of German multinational firms over the years 1999–2010, we find that investments of tax avoiders do not respond to host-country profit taxes at all, while those of non-avoiders do. About 11% of the affiliates are estimated to be able to avoid taxes. These investments account for about 58% of the stock of foreign fixed assets held by German multinational firms abroad. A one-percentage-point increase in the statutory corporate profit tax rate of a host country is found to reduce the fixed assets of non-avoiders in that host country by 0.81%.

On the Double Taxation of Corporate Profits

This paper studies the aggregate and distributional effects of switching from taxing corporate profits at the firm level to taxing them at the household level, in the form of dividend and capital gains taxes. It is argued that a careful analysis of the relevant trade-offs necessitates the construction of a model that incorporates substantial heterogeneity across households and across firms. Such a model is constructed and used to evaluate the effects of several alternative reforms, where the main focus is on how to finance a reduction in corporate profits taxes. It is shown that using shareholder taxes to finance such a tax cut represents a better alternative to using labor income taxes, because it generates welfare benefits for a majority of households and can thus gather popular support. Focusing on shareholder taxes, the option of increasing dividend taxes only is evaluated against another alternative in which both dividend and capital gains taxes are increased. The former reform has the unintended consequence of creating misallocation of capital and this reduces the overall welfare benefits. The latter reform avoids introducing this distortion and is found to be the best alternative. In this scenario, a complete elimination of corporate profits taxes leads to an increase in long run output of approximately 2% and welfare gains equivalent to 1% of consumption. A less dramatic reform, in which the tax rates on all types of personal income as well as on corporate income are equalized, yields smaller overall benefits but is found to benefit more than 95% of households in the economy.

CORPORATE TAX CUTS AND FOREIGN DIRECT INVESTMENT

Accurate policy evaluation is central to optimal policymaking, but difficult to achieve. Most often, analysts have to work with observational data and cannot directly observe the counterfactual of a policy to assess its effect accurately. In this paper, we craft a quasi-experimental design and apply two relatively new methodsthe difference-in-differences estimation and the synthetic controls methodto the policy debate on whether corporate tax cuts increase foreign direct investment (FDI). The taxation-FDI relationship has attracted wide attention because of mixed findings. We exploit a quasi-experimental design for Russian regions, which were granted autonomy to reduce corporate profit tax in 2003, enabling them to simultaneously experiment with different tax policies. We estimate both the average and local treatment effects of two types of tax cuts on FDI inflows. We find that, on average, relative to the absence of tax cuts, nondiscriminatory tax cuts on direct investment profit increase FDI, but discriminatory tax cuts on selected government-sanctioned investment projects do not. Yet for both types of tax cuts, local treatment effects vary dramatically from region to region. Our research has important implications for the design of tax policy and fiscal incentive, and the assessment of fiscal policy reforms. (Less)

Asymmetric Oligopoly and Foreign Direct Investment: Implications for Host-Country Tax-Setting

We present a duopoly model with heterogeneous firms that vary in cost-efficiency, each of which can choose to serve a foreign market by either exporting or local production. We do so to analyse the effects of a host-country corporate profit tax on both the scale and composition of FDI, and find that: strategic interaction between oligopolistic firms provides for a pattern of FDI that favours cost-inefficiency to the detriment of host-country welfare; and the host-country tax rate can be optimally used to avoid such patterns of FDI and instead promote direct investment by a relatively cost-efficient firm.

The Architecture of Compromise: Why CFOs Might Endorse a 100% Corporate Profit Tax, Repatriate Overseas Profits, Increase Dividends, and Reinvigorate U.S. Equity Capital Market Activity

This brief essay explores modes of compromise and how novel approaches can resolve an impasse. The debate on U.S. corporate tax policy is used as an example. Attempts by bitterly divided parties to compromise on ideological issues by “splitting the difference” can prove a fruitless exercise. That has certainly been the case with regard to U.S. federal tax policy in general and, specifically, with respect to the 9.0% of federal revenues derived from taxation of corporate profits. Some parties are inextricably committed to taxing corporate profits more heavily. Others are equally devoted to reducing the corporate profit tax burden. Efforts to have the parties “split the difference” have at best wrestled effective tax rates marginally up or down from time to time. For years, a stalemate unsatisfactory to all has festered. We observe that, when dealing with irreconcilably opposed parties, a compromise that “bridges the gap” holds more promise for progress than one that “splits the difference”. As applied to the U.S. corporate tax rate debate, lashing together proposals to i) raise the federal corporate tax rate to 100% and ii) allow 100% corporate deductibility of dividend payments might span the divide between those who call for higher corporate tax rates and those who call for lower ones. In a way, each side gets 100% of what it wants. A static analysis indicates such a package would increase corporate tax revenue to the federal government by 146.9%; a dynamic analysis indicates it would cut corporate tax revenue to the federal government by 53.1% but bring a host of important, secondary benefits some of which would result in substantial, additional federal tax revenues. Secondary benefits that might reasonably be foreseen include: • A decline in corporate stock buyback activity • Repatriation of overseas profits • Sharply higher U.S. equity capital markets financing activity • Higher after tax return on equity capital for U.S. investors • Improved governance through discouragement of corporate empire building.

The Race to the Bottom: Incentives for New Investment?

Tax competition is one of the strongest credo of orthodox economic policy. However, empirical evidence suggests that tax incentives are not effective as tools for attracting foreign direct investment, but instead promote a race to the bottom in taxation of corporate profits, whilst also harming democratic forms of government and the ability of states to provide public services to their citizens. Tax competition is accompanied by a fierce regulatory competition leading to a race to the bottom on international financial regulation. The latter has facilitated the establishment of a huge shadow banking system which lies at the root of the present international financial crisis. A pro-poor development consensus needs a new tax agenda. The Follow-up International Conference on Financing for Development in Doha (End of November /early December 2008) offers an opportunity to bring taxation to the heart of the development discourse. The Tax Justice Network has taken a lead role in promoting this dialogue.

Non-Discrimination and the Taxation of Cross-Border Dividends

At a domestic level, dividend tax systems are usually designed to relieve the economic double taxation of corporate profits and are related to the personal taxation of savings income. Increasingly over the last 40 years, however, international considerations have intruded upon domestic tax policy. Source country taxation of corporate profits and residence country personal taxation of dividends have limited domestic tax policy options and decoupled corporate and personal tax systems. This article examines the issues for dividend tax policy in an international setting and the role of bilateral tax treaties in addressing those issues. The article explains how, within the European Union, the freedoms guaranteed by the EU Treaties have dictated Member States’ tax policy options. It concludes that general non-discrimination principles, in contrast to specific treaty provisions, have a limited role to play in resolving the competing claims of source and residence countries to tax the return on corporate activity.

ECONOMIC AND POLITICAL DETERMINANTS OF PUBLIC SECTOR BUDGET DEFICITS: THE CASE OF NIGERIA

The main focus of the paper is to analyze the effects of both economic and political variables on public sector budget deficits. The econometric results show that the main determinants of budget deficits include international capital inflow, international interest rate, debt service costs, public expenditure, political instability and economic growth. The author makes the following recommendations. Firstly, international capital should be used to finance projects that contribute meaningfully to the economy. Secondly, since international interest rate is outside the control of Nigeria’s government and monetary authorities, emphasis on foreign loans should be reduced. Thirdly, government should avoid external debt where necessary. Fourthly, government should increase her spending on infrastructural development. Furthermore, government should strengthen the political institutions including the judiciary, as well as create a level playing ground for all its citizens, so as to promote political stability. Moreover, government should give more incentives and subsidies such as low corporate profit tax, improvement in power and energy generation, etc., in order to encourage producers as well as promote economic growth. Lastly, government should sustain the on-going war against corruption so that public funds are not misappropriated or embezzled by government officials.

Debt and Equity: What's the Difference? A Comparative View

The divide between debt and equity belongs to the focal points of national and international tax law. Under domestic individual income tax law, it is crucial for the distinction between a creditor-debtor relationship and a full partnership of taxpayers jointly carrying on a business. Under domestic corporate income tax law, it is decisive for the application of a two-layer taxation of corporate profits and dividends. Under international income tax law, the allocation of taxing rights and the application of withholding taxation follows largely the distinction between debt and equity. Against this background, this article analyses on a comparative basis the major features of debt and equity under corporate law, accounting law and tax law in six jurisdictions (Austria, France, Germany, Switzerland, United Kingdom, United States). It becomes clear that the debt-equity divide is shaped differently for purposes of individual income taxation, corporate income taxation and international income taxation. While individual or corporate income taxation largely looks at the similarities between a full partner or a full shareholder on the one hand and the holder of a hybrid debt instruments on the other hand, international tax rules tend to include all sorts of profit-dependent payments under the rules for corporate profits and dividends. It remains to be seen whether the dependency of payments on contingent profits (or other proprietary elements of a business entity like turnover) forms a convincing rationale for the existing distinctions between debt and equity in the international tax arena or whether tax policy should opt for full or near equal treatment of these financial instruments.

Comment imposer le capital ?

Nous presentons et discutons les principaux resultats theoriques concernant l'imposition optimale du capital et nous les illustrons par un ensemble de simulations. Apres avoir montre qu'il etait souhaitable d'eviter la double imposition du capital investi dans l'entreprise, nous caracterisons les taux d'imposition optimaux, en mettant l'accent sur leur profil temporel, alors que la litterature tend a se restreindre a l'etude de la situation de long terme. Nous montrons que le celebre resultat de Chamley, Judd et Jones-Manuelli-Rossi prend une forme differente selon le modele dans lequel il s'applique. Les distorsions introduites par l'imposition du capital sont importantes mais ne conduisent pas a preconiser une absence totale d'imposition.

Corporate profit tax, capital mobility, and formula apportionment

The paper develops an analytical framework in which regional governments strategically determine the structure of the corporate profit tax system when an apportionment formula determines the proportion of the firms' income subject to regional taxation. The conclusions can be summarized as follows: (i) Regional governments subsidize capital through the corporate tax system. (ii) Tax rates become higher and the portion of capital costs that can be deducted from taxable income becomes smaller as the formula weighs more production shares. (iii) The regionally provided good may be below or above the efficient level. (iv) The extent of the distortion depends on the particular formula put into practice. (v) Regional governments strictly prefer a formula that exclusively weighs the production proportion to any other alternative.

06/01030 South-East Europe Regional Energy Market: challenges and opportunities for Romania: Kennedy, D. et al. Energy Policy, 2005, 33, (17), 2202–2215.

Heterogeneous firm productivity raises the question of whether governments should pursue ‘pick-the-winner’ strategies by subsidizing highly productive firms more (or taxing them less) than their less productive counterparts. We study this issue in a setting where governments can set differentiated effective tax rates in an oligopolistic industry in which firms with two productivity levels co-exist. We show that the optimal structure of tax differentiation depends critically on the feasible level of the corporate profit tax, which in turn depends on the degree of international tax competition. When tax competition is weak and optimal profit tax rates are high, favoring high-productivity firms is indeed the optimal policy. When tax competition is aggressive and profit taxes are low, however, the optimal tax policy reverses and favors low-productivity firms.

A Modigliani-Miller Theory of Altruistic Corporate Social Responsibility

Abstract A new theory of altruistic corporate social responsibility is developed. Firms that advertise their social and environmental good works in effect solicit charitable contributions from customers, employees, investors and other stakeholders. They compete with not-for-profits in the market to supply public and altruistic goods. To analyze how corporate altruism affects firm valuations, a model is developed in which investors gain utility both from personal consumption and from making donations to worthy causes. A share in a “responsible" firm is a charity-investment bundle. When individuals view corporations and not-for-profits as equally competent suppliers of charity-related “warm glow," small changes in firms' social policies induce exactly offsetting changes in individuals' portfolio choices. There is no effect on firm valuations, and no change in the aggregate supply of good works. When a sizable fraction of investors prefer corporate philanthropy over direct charitable giving (e.g., to avoid taxation of corporate profits), firm valuations will be maximized by following social policies that involve strictly positive levels of corporate altruism.

A Modigliani-Miller Theory of Corporate Social Responsibility

A new theory of altruistic corporate social responsibility is developed. Firms that advertise their social and environmental good works in effect solicit charitable contributions from customers, employees, investors and other stakeholders. They compete with not-for-profits in the market to supply public and altruistic goods. To analyze how corporate altruism affects firm valuations, a model is developed in which investors gain utility both from personal consumption and from making donations to worthy causes. A share in a responsible firm is a charity-investment bundle. When individuals view corporations and not-for-profits as equally competent suppliers of charity-related warm glow, small changes in firms' social policies induce exactly offsetting changes in individuals' portfolio choices. There is no effect on firm valuations, and no change in the aggregate supply of good works. When a sizable fraction of investors prefer corporate philanthropy over direct charitable giving (e.g., to avoid taxation of corporate profits), firm valuations will be maximized by following social policies that involve strictly positive levels of corporate altruism.

Transfer Pricing and Enforcement Policy in Oligopolistic Markets

In this paper we set up a symmetric two-country model with trade costs and international ownership to study the transfer pricing decisions by two multinationals operating in markets with Cournot competition. We let governments choose both the corporate profit tax rate and the level of enforcement of the arm's length principle and we examine how enforcement policies affect the tax competition game. Furthermore, we analyze in what direction economic integration, in terms of a reduction in trade costs and/or a larger international ownership of multinationals, influences the symmetric equilibrium level of the two policy instruments. We show that increased economic integration may lead to higher equilibrium tax rates, and that, as governments increase the level of enforcement, equilibrium tax rates increase as well. Moreover, we find that, when the two MNEs are not fully owned by domestic residents, trade liberalization decreases the equilibrium enforcement policy, while increased international ownership increases the level of enforcement.