Measures Of Effective Tax Rates Research Articles

Taxes and Firm Size: A 40-Year Perspective

We examine the statutory incidence of the federal corporate tax on firms by asset size over a 40-year period spanning numerous tax changes. In contrast to previous studies, which have been based upon financial statement measures of effective tax rates, we examine the relation between taxes and asset size using published tax return data and a common measure of distribution. The results suggest that the corporate tax burden has become relatively proportional to firm size over the last 40 years, only slightly favoring larger firms.

MNE tax strategies and Ireland

PurposeA systematic assessment of multinational enterprise (MNE) tax minimisation strategies at the firm level is difficult. This paper aims to present systematic evidence for Ireland of tax minimisation strategies at both an aggregate and individual firm level. The paper uses Apple and Google as its case studies.Design/methodology/approachThe paper is based on 31 US intellectual property (IP)-intensive MNEs with substantial operations in Ireland. Financial and other data including tax payments were extracted from Form 10K and filings in Companies Registration Office in Ireland.FindingsThe paper develops three different measures of effective tax rates and that tax strategies have resulted in effective tax rates lower than the nominal US tax rate and far lower than those published in company accounts. Although two-thirds of profits are earned outside the USA, around 70 per cent of corporate tax is paid in the USA.Research limitations/implicationsThe paper relies on data from a subset of MNEs operating in Ireland. The paper also uses publicly available data which may not be available for all firms.Practical implicationsThe findings have implications for European Union (EU) tax policy and tax revenues in countries where MNEs operate. The paper also has implications for industrial policy based on attracting Foreign Direct Investment (FDI).Social implicationsThe study has implications not only for the equitable distribution of corporate tax payments and income distribution but also especially for a tax-based industrial policy.Originality/valueMNE tax strategies, although of considerable public interest, are often obscure and poorly understood. The paper is original in providing a detailed examination of MNE tax strategies at the firm level and discussing some implications from a public policy perspective.

Effective Tax Rates Under IP Tax Planning

Tax planning with intangibles has become one of the most popular and most vividly debated topics in international taxation. We incorporate various intellectual property (IP) tax planning models into forward-looking measures of effective tax rates, namely the disposal of intangibles to low-tax subsidiaries, intra-group licensing arrangements, and intra-group contract R&D. In doing so, we draw upon the methodology put forward by Devereux and Griffith and amend this model by considering a research & development (R&D) investment which is carried out by a parent company, whereby the resulting intangible is exploited by a foreign subsidiary. We point out analytically under which conditions IP tax planning achieves the objective of reducing the effective average tax rate of the group. We find that the disposal of intangibles to low-tax subsidiaries does not achieve this tax planning objective, if the true value of the asset is subject to tax upon the disposal. We show to what extent the parent must understate the value of the intangible in order to reduce the group’s tax burden. We furthermore point out that contract R&D may generally achieve a significant lower effective tax burden. We present cost of capital and effect average tax rates to illustrate these findings.

Labour Taxation in the European Union - Convergence, Competition, Insurance?

Carlos Martinez-Mongay outlines labour tax trends in the European Union over the last three decades. The analysis is based on macro data: the average effective tax rates on labour, consumption and capital. Different measures of effective tax rates on labour in EU Member States are calculated; they are compared with those in the USA and Japan and with the effective tax rates on consumption and capital. All the measures show that the tax burden on labour has increased in the EU over the last three decades both in absolute terms and in comparison to the effective tax rate on capital. Moreover, over the same period the tax rates on labour, consumption and capital have converged across EU countries. These trends largely depend on two factors: the increase in social spending and international tax competition. However, concerning the latter there is little evidence that changes in tax rates on labour are related to changes in tax rates on capital. This suggests that international co-movements of tax rates and tax revenues may be due to common structural changes underlying tax policies rather than to tax competition forces.

TAX POLICY REFORM: THE ROLE OF EMPIRICAL EVIDENCE

To understand the role of evidence in tax policy design, this paper organizes the empirical analysis of reform under five loosely related headings: (i) key margins of adjustment, (ii) measurement of effective tax rates, (iii) the importance of information and complexity, (iv) evidence on the size of responses, and (v) implications from theory for tax design. The context for the discussion is the recently published Mirrlees Review of tax reform. Although the Review focused on all aspects of tax reform, this paper highlights the taxation of earnings. It also comments on earnings taxation in the context of VAT base-broadening reforms and the taxation of capital.

Viewpoint: Empirical evidence and tax policy design: lessons from the Mirrlees Review

Abstract This paper examines the role of evidence in drawing up the recommendations for tax reform in the Mirrlees Review. The arguments are organised loosely under five related headings: (i) Key margins of adjustment. (ii) Measurement of effective tax rates. (iii) The importance of information and complexity. (iv) Evidence on the size of responses. (v) Implications from theory for tax design. Although the Mirrlees Review focuses on all aspects of tax reform, the focus is this paper is on the taxation of earnings with some examples drawn from the taxation of consumption and savings.

The Rich Demystified - A Reply to Bach, Corneo, and Steiner (2008)

The contribution Bach, Corneo, and Steiner (2008) has argued that rich do not pay taxes adequately in relation to their income, finding, for instance, an effective tax of only 38.1% for the 0.001% fractile of German income taxpayers in 2001. This result contrasts sharply with the legislated top marginal income tax of 48.5%. We subject the results contained in Bach, Corneo, and Steiner (2008) to a rigorous analysis: We find major flaws and inconsistencies with regard to methodology, i.e. the omission of corporate taxes and intertemporal aspects of taxation. Restating basic rules for the measurement of effective tax rates, we provide values for what we term the comprehensive nominal tax rate (CNTR) and show that the headline result in Bach, Corneo, and Steiner (2008) of 38.1% is underestimated by over 12 percentage points. As an important distributional result, the CNTR increases with increasing taxable income.

Measuring tax distortions with neutrality-based effective tax rates

In public economics, effective tax rates (ETRs) are often used to measure the combined effects of tax rates, tax bases, and the time effect of taxation. Until now, the modelling of comparable figures for revealing tax effects and tax-induced distortions is not solved satisfactorily. This paper derives an ETR approach based on neutral tax systems. In contrast to traditional measures of ETRs, the neutrality-based ETR discloses preferential or discriminatory taxation of investments regardless of their pre-tax rate of return. Moreover, comparing different ETRs exposes the degree of tax-induced investment distortions.

The Measurement of Effective Tax Rates: Common Themes in Business Management and Economics

Economic agents who face the diversity of tax systems demand condensed but sophisticated information on effective tax burdens. We analyse common features and differences between important forward-looking concepts of measuring effective tax rates in business management and economics and develop some useful properties for analysing and communicating them. We explore how the instruments can be employed to provide information on the impact of taxation on decision-making, competition, and distribution. The large variety of instruments proves very useful. However, it turns out to be necessary to reveal the measurement’s scope and to carefully choose the adequate approach and measure.

The Tax Burden on Cross-Border Investment: Company Strategies and Country Responses

We look at the tax burden on direct investment from three perspectives. The first section illustrates how the recognition of company tax planning and of the importance of intellectual property affects measures of effective tax rates. It also discusses the methodological issues that arise, such as to which subsidiary the benefits of a multicountry strategy should be attributed. The simulations emphasize the importance of the share of royalties in crossborder income, and of tax planning strategies such as the shifting of debt to high-tax locations. At the same time, evidence on actual company behavior is necessary to limit the range of possible tax avoidance strategies. Otherwise, the effective tax burden on cross-border investment would virtually disappear. Even then, the range of possible estimates is large. The simulations also show how home governments can respond to some types of tax planning by, for example, requiring that parent interest expense be allocated to foreign income. The second section supplements the hypothetical calculations by evaluating the determinants of the actual effective tax rate on overall U.S. manufacturing investment abroad. Among the various components are the location of assets, the location of debt, other forms of income shifting, the share of royalties, and home government repatriation taxes. The results are generally consistent with the simulations in the first section. Somewhat surprisingly, real assets seem more mobile than tax bases, confirming the constraints on tax avoidance. The first two sections demonstrate that it is not the more obvious features of a tax system, such as whether foreign dividends are taxed or exempt, that are important, but provisions that govern the taxation of royalties, the use of tax haven finance subsidiaries, and the allocation of parent interest expenses to foreign income. The third section introduces host government behavior to see how they tax different types of companies. As expected, they seem to favor more mobile companies and those that offer benefits to local factors such as labor. Companies that sell a large share of their output offshore receive concessions while those that import a great deal of their components are penalized, presumably because of the positive and negative impacts on country terms of trade. Subsidiaries of R&D intensive companies pay higher effective tax rates, suggesting rent extraction by the host government.

Corporation tax asymmetries and investment: Evidence from U.K. panel data

Theoretical work has emphasised the potentially powerful impact of corporation tax asymmetries on investment behaviour, but empirical work has mainly been confined to the measurement of effective tax rates. This paper uses panel data from 597 U.K. companies to ask: Are tax asymmetries important to understanding observed investment behaviour? An optimising investment model is developed and estimated both as a Q equation and a Euler equation in which the cost of capital appears. Careful modelling of asymmetries does not noticeably improve the empirical performance of these equations. Possible explanations are discussed.

Taxes and firm size

Firm size has been used as a proxy for the firm's political costs and hence managers' proclivity to choose income reducing accounting procedures. This study provides additional evidence on this topic by examining the association between firm size and effective corporate tax rates. The latter are one component of a firm's political costs. The roughly fifty largest U.S. exchange-listed firms, in particular oil and gas companies and manufacturing firms, have significantly higher worldwide tax rates than other firms. These higher tax rates are observed primarily after the implementation of the U.S. 1969 Tax Reform Act and after the OPEC countries raised their tax rates on U.S. oil producers. The findings, which are insensitive to alternative sources of data, alternative measures of firm size, and alternative measures of effective tax rates, are consistent with the use in previous studies of firm size as a proxy for the firm's political costs.