Average Effective Tax Rates Research Articles

Can tax competition boost demand? Causes and consequences of the global race to the bottom in corporate tax rates

Corporate tax rates have been consistently falling around the world for decades now. This paper aims to explain the causes and consequences of this ‘global race to the bottom’. In particular, the author wishes to test the hypothesis that this race to the bottom is driven by demand-boosting corporate tax competition, where, contrary to traditional Kaleckian theory, lower corporate taxes may positively affect demand through increased investment due to multinational enterprises (MNEs) that seek higher net profits through (re)locating in low-tax jurisdictions. In order to do so, the author builds a general theory of the effect of average effective corporate tax rates (AECTRs) on MNE location. This theory is used to justify the addition of a tax-sensitive foreign direct investment channel in the investment function of a canonical Kaleckian model. As a result, this paper determines the conditions under which a country may be ‘tax-competition-led’, where lowering AECTRs increases demand through increased MNE investment and in spite of the negative effect on government expenditure given a balanced budget. The findings of this paper are that it is possible for an economy to be tax-competition-led, though it is unlikely in many cases given the existence of a coordination problem that lessens or nullifies the effect of lowering AECTRs when many countries do so simultaneously. The author refers to this problem as the ‘paradox of tax competition’, since, like other fallacies of composition commonly identified in Post-Keynesian thought, this is a phenomenon where the benefits of one country acting alone are reduced or eliminated if other countries act the same way at the same time. Based on this model, crude but nonetheless informative estimates are given that indicate that the race to the bottom has had a negative effect on demand in the vast majority of OECD countries. In this sense, the author finds that the persistence of policymakers to continue to compete on corporate taxes ‘imprudent’. Model-consistent policy recommendations are offered, chief among which are tax coordination or, failing that, technical changes in how individual countries collect corporation tax.

The Relationship Between Effective Tax Rate and Firm Size

The current research studies firm size and other determinants of effective tax rates for UK companies operating in the wholesale and retail trade sector. A panel of 784 companies from the BvD Company Independence Indicator (BvD's FAME database) is studied over the six-year period 2008-2013. The research approach is unique in terms of the comprehensive data it is using as it is large panel data and it involves finance and accounting analytics. The analysis shows that size and profitability were significant factors affecting the average effective tax rates of companies in the wholesale and retail trade sector.

Spread between the Moody’s Aaa-Rated Corporate Bond Yield and the Yield on Municipals: Co-integration Analysis

While the research linking interest rates to government deficits is extensive, the impact of other tax-related variables is uncommon. This study seeks to add to the literature on credit markets by exploring the impact of not only the budget deficit but also average effective personal income tax rates and personal income tax evasion as explanatory variables. To the best of our knowledge this study is the first study to recognize the joint importance of all of these fiscal variables. We utilize data covering the post-Bretton Woods period from 1971 through 2016 to analyze the impact of the three variables in order to shed light on the spread between the real interest rate yields on Moody’s Aaa-rated corporate bonds and high quality municipal bonds. Estimations reveal that the higher the average effective federal personal income tax rate, the greater the differential between the yields on corporate bonds and tax-free Municipals. Furthermore, it is found that the higher the adjusted gross income gap, the greater the real yield spread between Moody’s Aaa-rated corporate bonds and high quality municipal bonds. Finally, the greater the primary budget deficit, the greater the spread as well.

Tax Burdens in Japan and South Korea: Measurement Using Average Effective Tax Rates

AbstractAlthough tax policies in Japan and South Korea have notably changed over recent decades, few studies have thoroughly examined the nature of these changes. Building on the average effective tax rates developed by Mendoza et al. (1994) and OECD researchers (Carey and Tchilinguirian 2000; Carey and Rabesona 2003) and extending and revising their original data, this study analyzes the structure of tax burdens in these two countries over 1995–2015. In particular, it examines the scholarly claim that taxation in these countries has become increasingly neoliberal over recent decades. The author finds insufficient evidence to support fiscal neoliberalism as race-to-the-bottom cuts in public taxation. Future studies may conduct in-depth comparative and case analyses to better understand the nature of the new tax structure emerging in these countries.

The Impact of Effective Corporate Tax Rates on Investment

There exists an intense debate about the effects of corporate tax cuts on the formation of private capital in the real sector. This paper studies the investment impact of the effective fiscal burden of firms during the period 1995-2014. To this end, in a first step national accounts data is used to calculate backward looking average Effective Corporate Tax Rates (ECTR) for 73 developed and developing countries. In a second step, a dynamic panel approach is employed to estimate the impact of the ECTR on private gross fixed capital formation and foreign direct investment inflows. The obtained results indicate that: (i) ECTR not only tend to be much lower than statutory corporate tax rates, but also have different dynamics over time; and (ii) there exists no clear statistically significant negative relationship between ECTR and private investment. Instead, private capital formation and FDI inflows are rather explained by economic growth, the persistence of investment spending, trade openness, and the quality of institutions. This finding is robust when alternative effective corporate tax rate measures or statutory corporate tax rates are considered

Utjecaj poreza na dobit na kretanje izravnih stranih ulaganja u zemljama članicama Europske unije

Većina raspoloživog kapitala nalazi se u posjedu pravnih osoba, odnosno poduzeća (najčešće multinacionalnih kompanija) sklonih ulaganju u širenje vlastitog poslovanja, što ne donosi samo dodatno uvećanje profita poduzeća, već indirektno utječe i na povećanje zaposlenosti, rast gospodarstva, razvoj domaćeg financijskog tržišta te općeniti napredak države. Zato države širom svijeta aktivno utječu na formiranje povoljnog poslovnog okruženja koje će imati učinak na povećan priliv izravnih stranih ulaganja (Foreign Direct Investments – FDI). Cilj ovog rada je utvrditi utjecaj oporezivanja dobiti na privlačenje izravnih stranih ulaganja u zemljama članicama Europske unije. Statička panel analiza provedena je za razdoblje od 1998. do 2017. godine na 28 zemalja članica u cjelini, te posebno na starim članicama (EU 15) i novim članicama (EU13). Uz različite kontrolne varijable, kao nezavisna varijabla analizirane su različite stope poreza na dobit – zakonska (službena, nominalna) stopa poreza na dobit i efektivne (prosječna i granična) porezne stope u cilju ispitivanja stvarnog poreznog opterećenja trgovačkih društava i njihovog utjecaja na kretanje izravnih stranih ulaganja. Zaključeno je kako porez na dobit značajno utječe na kretanje izravnih stranih ulaganja trgovačkih društava u novim zemljama članicama Europske unije (koje karakterizira niže porezno opterećenje), ali ne kao primarni čimbenik, pri čemu se ističe društveni proizvod. U tom kontekstu najveći utjecaj ima efektivna prosječna porezna stopa.

Bilateral Tax Competition and Regional Spillovers in Tax Treaty Formation

Tax treaties are often seen as a means to mitigate fierce tax competition. Building on former literature, we challenge this view by arguing that taxes on passive income reduce effective average tax rates; and induce neighbouring countries to react by reducing bilateral tax rates. As opposed to traditional tax competition, where every foreign investor would benefit from lower tax rates, we show that countries also engage in cutting tax rates for investors from a particular country, leaving taxes for everyone else unaffected. We call this bilateral tax competition, and we test these predictions empirically. We focus on the four treaty withholding tax rates on passive income - portfolio dividends, participation dividends, interest, and royalties - and collect these rates for 3,000 tax treaties and amending protocols signed between 1930 and 2012. We find a positive relationship in the negotiated withholding tax rates of a destination country's tax treaty and destination country's competitors' past tax treaties with the same source country. This relationship is strongest for the tax rates on interest and royalties.

Investors´ decision on the context of the effective taxation of agricultural companies

The analysis of the effective taxation combines two different effective tax rates which are crucial for placement and monitoring of the investment amount in the particular country. Both of these tax rates are important for investors who make a decision on the benefits, as well as the risks of corporate taxation in the country. The contribution deals with the problem of the effective taxation through effective average tax rates (EATR) and effective marginal tax rates (EMTR). Especially, it focuses on agricultural production companies. The effectivity of taxation was observed for selected intangible and tangible assets for a period of 2004 and 2018. Our analysis evaluated the influence of the change in the statutory tax rates (and the other taxes and indicators, as well) on the change in effective average tax rates on capital in the agricultural companies. Based on the results, the lowest EATR, ranging from 20.79% to 25.25%, reported agricultural lands in both reference periods and for both ways of financing. Analyzing EMTR we found out that the lowest value reported investments in intangible assets that have crucial significance for investors. Our results definitely made it clear that in the EATR ↔ EMTR relationship, a form of financing investments is decisive. This relationship is used when an investor decides between several mutually exclusive locations or types of investment in a given country. In equity financing, the most effective capital is investing in intangible assets, and when we consider financing from external sources it is investment into stocks. An increase in the statutory tax rate of 2% resulted in a 12% increase in effective average tax rates.

The Analysis of the Cross-border Corporate Profit’s Taxation

Ensuring the same competition conditions for the companies in EU requires tax harmonization between Member States. In this paper, we review some elements of the harmonization efforts. We will discuss the OECD guidelines on direct taxation and the transfer price regulation as a way to regulate corporate tax optimization behaviour. Based on the Effective Average Tax Rate we introduce the differences in the taxation of profits between Member States. The Common Consolidated Corporate Tax Base is one of the key elements in the harmonization of cross-border corporate profit taxation, so our study has a special focus on the proposal. The undisputed advantage of the CCCTB would be the simplification of the taxation of transactions between Member States. However, it also raises the question of how it limits the ability of each Member State to attract capital and to what extent can assign the profit tax to the given country in proportion to the operation of a company and with this how to realize that the base of the corporate tax focuses on the place of activity.
 
 

Do income taxes affect corporate social responsibility? Evidence from European‐listed companies

AbstractThis study explores empirically the effects of corporate income taxes on the incentive to invest in corporate social responsibility (CSR) activities. We estimate the relation between CSR ratings and firm‐specific corporate effective tax rates for a large sample of nonfinancial‐listed companies from 15 European countries during 2006–2016. By employing an instrumental variable approach, we find that average effective tax rates are negatively correlated with CSR ratings. Our findings are also consistent under additional tests and robustness checks. We, therefore, can provide suggestive evidence that corporate taxation discourages corporate socially responsible behaviour. At the same time, in a tax policy perspective, our analysis suggests how countries could encourage through the tax system the corporate provision of sustainable investments.

Do firms using real earnings management care about taxes? Evidence from a high book-tax conformity country

Using a sample of 1,149 firm-year observations we show that benchmark-beating firms entering into real earnings manipulation are less willing to engage in aggressive tax planning. Controlling for a “normal level” of tax aggressiveness within the industry we provide evidence that average GAAP effective tax rate for benchmark-beaters is higher than for their industry peers. One of the possible reasons may be unwanted scrutiny by tax authorities and external monitors that hinders the real activities manipulation. All in all, our results suggest that real earnings management is even more costly than is widely considered.

The extensive macro labor supply elasticity: Integrating taxes and expenditures

This paper shows that accounting for certain public expenditures is crucial when comparing labor tax system efficiencies across countries. To measure the extensive margin response to taxation, I assemble a large cross-country dataset consisting of the employment ratios, the average effective tax rates, the out-of-work benefits (transfers), as well as public expenditures on childcare, elderly care, and family policy, covering all OECD countries and more than two decades. When not controlling for the country- and year-fixed effects, the extensive margin elasticities are negative. Once accounting for transfers, the elasticities are negative or at most flat, even with fixed effects. Once additionally accounting for public expenditures (subsidies) on labor complements - which are robustly positively associated with the employment-to-population ratios - I obtain either flat or positive extensive margin elasticities in the lower end of the expected range.

Capital taxation efficiency of agricultural businesses in the Slovak Republic

Effective tax rates are presented by indicators of the actual corporate tax burden, which take into account the impact of all the elements listed in the legislation. The submitted contribution explores the issue of effective taxation through effective average tax rates (EATRs) focusing on agricultural production enterprises. The analysis assessed the effect of changing the statutory tax rate (and other taxes and factors) on changing the effective average rate of capital. Taxation efficiency was monitored for selected intangible and tangible assets for 2004 and 2018. Analysis indicated a depreciation tax shield that tracked the amount of tax savings on capital investment as well as the economic rent of the project with taxation. The analysis showed that a 3% increase in the statutory rate over the reference period increased the effective average corporate rates for intangible assets by 13.35%, tangible assets by 14.25% and inventories by 16.63%. The highest annual tax saving was achieved in 2018 for tangible assets of € 4,647.50, with a four-year return.

An empirical analysis for the US of the impact of federal budget deficits and the average effective personal income tax rate on the ex post real interest rate yield on ten-year Treasuries

We investigate the impact of federal government budget deficits and federal personal income tax rates on the ex post real interest rate yield on ten-year US Treasury notes. Using autoregressive two-stage least squares estimations for the post-Bretton Woods era, we find that the yield on these Treasury issues has been an increasing function of the federal budget deficit as a percent of GDP, both in the form of the total/unified deficit and the primary deficit, and also an increasing function of the average effective federal personal income tax rate. The estimation reveals that growth in the M2 money supply (relative to GDP) acts to reduce the real interest rate yield on ten-year Treasuries. Consequently, while a growing money supply can help to keep real interest rates on Treasury notes (and hence federal debt service costs) down, policymakers should be sensitive to the fact that both budget deficit increases and tax rate increases can elevate the real interest rate. JEL codes : E43, E62, H62

Policy Forum: Business Tax Reform in the United States and Canada

The authors examine some of the key features of the US Tax Cuts and Jobs Act (TCJA) and discuss the implications for Canadian corporations and government revenues. They show that the tax advantage that Canada enjoyed prior to the TCJA has declined significantly, in terms of both statutory and effective (marginal and average) tax rates. They discuss the economic effects of possible responses to the TCJA by Canadian governments, including cutting statutory rates and accelerating tax depreciation deductions. Looking ahead, the authors argue that it would be preferable to focus on a more fundamental tax reform based on the taxation of economic rents.

Tax and Spending in the 2020s

Tax and Spending in the 2020s

Measuring and Interpreting Countries’ Tax Attractiveness for Investments in Digital Business Models

This article analyses the tax attractiveness of locations for investments in digital business models. It identifies and assesses relevant tax rules affecting domestic and cross-border digital business models across thirty-three countries. The computation of average effective tax rates is based on the neoclassical investment model of Devereux/Griffith. Our results help to evaluate tax-related location factors in the digital economy by combining the most relevant tax parameters and rules for taxable nexus in an objective measure. We find that investments in digital business models face generally lower average effective tax rates than those in traditional business models since a high share of investment costs is immediately expensed and a higher share of activities falls within the scope of countries’ tax incentives for R&D input and/or output. While more generous depreciation rules for digital investments such as software make countries relatively more attractive, our results are mostly driven by statutory tax rates, special incentive schemes such as Intellectual Property (IP) Boxes, R&D credits, and super-deductions. Overall, we acknowledge an increasing trend in tax competition for digital businesses.

The effect of chief financial officers’ accounting expertise on corporate tax avoidance: the role of compensation design

Accounting expertise is closely related to corporate tax planning, and hence, corporate chief financial officers (CFOs) with accounting expertise may have advantages in exploiting tax planning opportunities. By manually collecting CFOs’ autobiographic information and identifying their accounting-related work experience, we empirically examine whether a CFO with accounting expertise is more likely than a CFO without such expertise to exploit tax planning opportunities, resulting in greater corporate tax avoidance. We find that CFOs with accounting expertise are negatively associated with corporate effective tax rates. The average effective tax rate of firms with accounting expert CFOs is approximately 19.4% lower than that of their counterparts with non-accounting expert CFOs, ceteris paribus. Moreover, the abnormal variable compensation of CFOs with accounting expertise is negatively associated with corporate effective tax rates. The results suggest that the accounting expertise and compensation schemes of CFOs can have a significant effect on the aggressiveness of corporate tax planning.

The Impact of Average Effective Tax Rate on China's Foreign Direct Investment: Evidence from 45 Countries

In the open economy, the government always regards improving the national competitiveness as an important strategic goal. The use of tax means is an important way of the application of national macroeconomic policies. How to effectively improve the competitiveness of the international tax system has become a matter of great concern to us. Based on the OECD average effective tax rate model, this paper uses the average effective tax rate as an indicator of the competitiveness of the international tax system to test its impact on China's FDI decision-making. It is found that the lower average effective tax rate of the host country is beneficial to the inflow of FDI. In the process of calculating the average effective tax rate, enterprise income tax is an important tax parameter affecting the marginal average tax rate. In order to improve the competitiveness of China's tax system, it is suggested to promote foreign investment and attract high-quality foreign direct investment. Consider the perfection of tax system from two perspectives of capital.

The unintended effect of import competition on corporate tax avoidance

The role of competition in corporate tax avoidance is theoretically unclear in the existing literature. This paper empirically examines this role, with a focus on import competition. I exploit financial statements to measure tax avoidance of US-listed firms and the conferral of Permanent Normal Trade Relations status on China as a quasi-natural experiment to establish causality. The results reveal that import competition fosters corporate tax avoidance. However, the effect is heterogeneous across firms. The average effect is driven by multinational enterprises, and more specifically by those implanted in tax havens. In response to the China shock, these firms invested in intangible assets to escape competition, but these intangibles also allowed them to intensify their profit shifting activities. These findings shed light on the determinants of corporate tax avoidance. More generally, they help understand the decline in the average effective tax rate of US-listed firms, the current backlash against large corporations and globalization, and the calls for reform of the international tax system.