The corporate income tax in the open economy: incidence and profit shifting

Abstract

This thesis investigates empirically the effects of the corporate income tax in an open economy. The analysis is carried out using linear panel-data regression methods. The first chapter studies the incidence of the corporate income tax. It introduces a model with location-specific rents which distinguishes between a direct effect and an indirect effect of the corporate income tax on labour. The former occurs when an increase in the corporate tax reduces the rent over which the employees and the company bargain. This reduces the bargained wage. The latter effect is the result highlighted in previous literature wherein an increase in the corporate tax reduces the stock of capital and consequently wages. Chapter 1 estimates the direct effect using accounting data from over 55,000 companies located in nine OECD countries (1996{2003) and finds that the tax is largely shifted to the labour force. Chapter 2 shows that measured productivity of multinational firms is overestimated in low-tax countries (and vice versa), because multinationals manipulate the value of sales upwards and the costs of intermediate inputs downwards. The analysis is carried out using accounts from about 16,000 firms located in 10 OECD countries (1998{2004). The results show that a 10 percentage points cut in the statutory corporate tax rate induces multinationals to increase their measured total factor productivity by about 10 per cent. Chapter 3 investigates the effect of tax haven operations in a corporate group. Using accounting data for about 3,400 corporate groups in 15 OECD countries (2003{2007), the study finds that tax haven operations reduce the tax liabilities of multinational companies by 7.4 per cent in the long run (at the mean). Also, the ETR of a corporate group with tax haven subsidiaries is one percentage point lower than the ETR of entities without such operations. Chapter 3 also finds that the marginal ETR of companies headquartered in a jurisdiction with a territorial system is lower than the marginal ETR of companies headquartered in jurisdictions adopting a worldwide taxation system