Reduce Corporate Tax Research Articles

Will Corporate Income Taxation Survive?

This paper explores the future of corporate income taxation, with special reference to the Netherlands. We review the empirical literature on a variety of distortions and arbitrage opportunities and pay due attention to effect sizes. An attempt is made to compare the size of various distortions in terms of the ex-post revenue impact of a corporate tax reduction. Thus, we learn which distortions impose the most serious threat to government revenue. This integrative approach allows us to understand recent developments in corporate tax regimes in the EU.

The impact of UK tax reform on share buybacks, capital investment and financing choices

An empirical survey, of 136 respondents from UK quoted companies, was conducted with regard to the likely effects of UK corporation tax reform on share buy‐backs, capital investment and financing choices. Overall, 45 per cent expected ACT abolition to lead to an increase in share buy‐backs. Logistic regression analysis links this view to corporate liquidity. The abolition of advance corporation tax is, however, unlikely to have a significant impact upon UK and overseas capital investment, bond issues, bond redemptions, share issues, finance leasing and projected dividend levels. Capital investment and financing choices are likely to be invariant to the combined effects of a reduced corporate tax rate and a quarterly collection period.

Some Equity and Efficiency Considerations of International Tax Competition

The paper uses a dynamic 2-country equilibrium model with imperfections in the labour market calibrated for the US and EU economy to investigate dynamic efficiency and equity aspects of international tax competition. We focus on tax policy where governments can only decide on the levels of corporate and labour taxes, given a constant share of government consumption and transfers in GDP and a constant VAT rate. We find that the welfare effect of a tax shift from capital to labour depends heavily on the distortionary nature of labour taxes. In contrast to existing results we find substantial positive international spillover effects of corporate tax reduction in one country, with long term gains outweighing short term losses. Results are very different, however, if one goes beyond the representative agent framework. According to our results, a tax switch is most likely not Pareto improving since net wages tend to decline in both regions even in the long run.

General equilibrium effects of investment incentives in Mexico

Mexico has experimented with a number of tax instruments designed to promote private capital formation. Among such initiatives are general and industry specific tax credits, employment tax credits, and corporate tax reductions. This paper examines the relative efficacy of such instruments using a dynamic computable general equilibrium model. Model simulations with Mexican data are carried out using three equal yield investment incentive scenarios. We find that a corporate tax reduction has the most stimulative impact on investment. The results emphasize the importance of using an open economy model. Unlike, for example, investment tax credits, tax rate reductions increase the demand for all capital rather than new capital alone. Hence the public increases its holdings of domestic debt, causing the price of domestic bonds to rise, real interest rates to fall, and domestic investment to increase.

Geographic Income Shifting by Multinational Corporations in Response to Tax Rate Changes

We investigate geographic income shifting by 191 U.S. multinational corporations in response to worldwide changes in tax rates during 1984-90. Between 1984 and 1986, the United Kingdom reduced corporate tax rates from a maximum of 45% to 35%, and in 1985 France reduced rates from 50% to 45%. Following these reductions in European rates, the United States reduced top corporate tax rates from 46% to 34% between 1986 and 1988. Canadian rates increased between 1984 and 1986 and then decreased through 1989. Beginning in 1988, numerous countries enacted tax cuts, apparently in response to those that occurred earlier in other countries. As discussed in section 3, differential changes in tax rates provide incentives for geographic income shifting by multinational firms. We identify two subperiods during 1984-90 in which relative tax rate changes

Firms' Responses to Anticipated Reductions in Tax Rates: The Tax Reform Act of 1986

The 1986 Tax Act in the U.S. gradually reduced corporate tax rates from 46 percent prior to the Act to 34 percent by the middle of 1988. This reduction gave firms an incentive, in 1986 and 1987, to shift taxable income to future years when tax rates would be lower. There are substantial impediments, however, to shifting taxable income across periods (notably, offsetting tax consequences to other contracting parties and a host of nontax costs), and it becomes an empirical question as to whether the benefits of shifting taxable income are sufficient to overcome the impediments. This paper examines whether firms deferred income recognition and/or accelerated expense recognition in anticipation of these declining tax rates. We find statistically significant evidence that firms shifted gross margin from the quarter immediately preceding and anticipated decrease in tax rates to the next quarter. We estimate that, on average, the 812 firms in our sample saved approximately five hundred thousand dollars in taxes by deferring sales. At a gross margin rate of one-third, this amounts to nearly twenty billion dollars of shifted sales for our sample firms.

Corporate Tax Cut and Capital Budgeting

ABSTRACT Corporate tax reduction is used as a fiscal tool to stimulate investment in depreciable assets. But such a tax cut has several direct and indirect effects on business investment which do not run in the same direction. This paper focuses on a “cash flow effect” which increases the profitability of projects, and a “discount rate effect” which reduces the profitability of capital investments. Ignoring the macroeconomic effects of a corporate tax cut and their feedback effect on business investment, the interaction of these two opposing forces renders the net effect of a corporate tax cut on capital investments theoretically indeterminate. However, a numerical example shows that for reasonable parameters, the net effect on capital investments of a tax cut may be positive.

Tax Policy and Changes to Subchapter C

Serious consideration was given in the late 1970's to proposals to integrate corporate and individual income taxes. These proposals focused primarily on plans which would allow shareholders who received dividends from domestic corporations to be given an income tax credit for all or a part of the corporate tax paid on the income from which the dividends were paid.' The argument for allowing shareholders to have a tax credit to offset the corporate tax paid was primarily economic: that it would increase the funds available for investment by corporations and, by making equity securities a relatively more attractive investment than before, increase the portion of corporate funds raised through the issuance of equity securities. Since the idea was to encourage distributions to shareholders, integration also implied a relatively high capital gains tax, at least on the sales of corporate stock, in order to tax retained corporate earnings at a relatively high rate. While increasing corporate investment has undeniably continued to be a goal of tax legislation since the integration debate, it is apparent that, at least through the 1984 Tax Reform Act,2 we have come full circle, choosing instead to reduce corporate tax liabilities by larger deductions and credits, to reduce the capital gains tax for individuals (and thus the tax burden on retained corporate earnings), and to strengthen the taxation of corporate distributions to shareholders. This approach to increasing corporate investment began with the Tax Reform Act of 19793 and has been continued by subsequent legislation. The Treasury tax reform proposals4 made at the end of 1984 would reverse this trend, but their future is uncertain.

Health policy under austerity capitalism: the impact of the "tax revolt".

The United States has moved from the postwar period of prosperity capitalism to the current era of austerity capitalism. Two pillars of austerity policy are cutbacks in social services, including health care, and a further shift in the tax burden from corporations onto individuals. The corporate-controlled media attempt to justify these austerity measures by insisting that the government cutbacks and corporate tax reductions represent the will of the people, as expressed by the "tax revolt" of Proposition 13 in California and Proposition 21/2 in Massachusetts. This paper argues that the tax revolt is actually a protest against the massive shift in taxes away from corporations and onto individual taxpayers. In addition, the tax revolt is not a rejection of government services, as the media and politicians have maintained. In fact, the majority of Americans want more rather than less public services and want more rather than less taxes on large corporations.