Tax Loss Offset Restrictions - Last Resort for the Treasury?: An Empirical Evaluation of Tax Loss Offset Restrictions Based on Micro Data

In Germany, the tax loss carry-forward of corporations significantly increased over the last decade. At the same time only a small percentage of losses have been effectively offset in the following periods. One potential reason for this puzzle is that stricter loss offset restrictions have been introduced in recent years. I use a newly developed micro simulation model for the corporate sector in Germany to evaluate the fiscal effects of these restrictions. Additionally, distributional breakdowns concerning the amounts of tax loss carry-forward and the effects of loss offset restrictions are provided. I find that the restrictions on the use of tax loss carryback are rather ineffective while the newly introduced minimum taxation considerably increases yearly tax revenue by 1.1 billion EUR.Micro simulation, loss offset restrictions, corporate taxation, tax loss carryforward, tax loss carry-back, tax reform

Don’t aim too high: the potential costs of high aspirations

The higher our aspirations, the higher the probability that we have to adjust them downwards when forming more realistic expectations later on. This paper shows that the costs induced by high aspirations are not trivial. We first develop a theoretical framework to identify the factors that determine the effect of aspirations on expected utility. Then we present evidence from a lab experiment on the factor found to be crucial: the adjustment of reference states to changes in expectations. The results suggest that the costs of high aspirations can be significant, since reference states do not adjust quickly. We use a novel, indirect approach that allows us to infer the determinants of the reference state from observed behavior, rather than to rely on cheap talk.aspirations, reference state, expectations, individual utility, experiments

Effective profit taxation and the elasticity of the corporate income tax base: Evidence from German corporate tax return data

We estimate the elasticity of corporate taxable income with respect to the effective corporate tax rate on the basis of a pseudo-panel constructed from corporate tax return micro data for the period 1998-2001, a period which saw the introduction of a major corporate tax reform in Germany. Endogeneity of the effective tax rate is controlled for by an instrumental variable approach. Our instrument for the observed effective corporate tax rate is the counterfactual effective tax rate a corporation would face in a particular period had there be no endogenous change of corporate profits. This counterfactual is obtained from a detailed microsimulation model of the corporate sector based on tax return micro data. We find a statistically significant and relatively large point estimate of the average tax base elasticity, which implies that a reduction of the statutory corporate tax rate would reduce corporate tax receipts less tha n proportionally due to income shifting activities. We also find some statistically weak evidence for the hypothesis that the tax base elasticity is higher for corporations that may benefit from various forms of tax shields. --corporate income taxation,tax base elasticity,micro simulation

Financial leverage and corporate taxation: Evidence from German corporate tax return data

We estimate the impact of effective profit taxation on the financial leverage of corporations on the basis of a pseudo-panel constructed from corporate tax return micro data for the period 1998-2001, a period which saw the introduction of a major corporate tax reform in Germany. The financial leverage is measured by the ratio of long-term debt to total capital. Endogeneity of the effective corporate tax rate is controlled for by an instrumental variable approach. Our instrument for the observed effective tax rate is the counterfactual tax rate a corporation would face in a particular period had there been no endogenous change of its financial structure. This counterfactual is obtained from a detailed microsimulation model of the corporate sector based on tax return micro data. We find a statistically significant and relatively large positive effect of the tax rate on corporate leverage: on average, an increase of the tax rate by 10 percent would increase the financial leverage by about 5 percent. We also find that the debt ratio is less responsive for small corporations and for corporations that benefit from various other forms of tax shields, in particular depreciation allowances and tax loss carry-forward. However, tax effects do not seem to depend on risk, although the level of economic risk does affect corporate leverage. --financial leverage,financial structure,debt ratio,corporate income taxation,corporate

Success in the University Admission Process in Germany: Regional Provenance Matters

School education in Germany is under the responsibility of the federal states and as a consequence average grades differ widely across regions. Since school leavers apply nationwide for admission to university, regional provenance may thus matter a lot for the success probability in the admission process. Using a comprehensive dataset of the German central clearing house for university admissions in 2006/2007, we show that success rates indeed differ dramatically between federal states, provided that grades are not made comparable across state boundaries. Most of the variation in success can be explained by state-level differences in grading. By defining quotas for federal states and restricting competition among applicants to the state-level, the link between state-level grading and success rates in the university admission process can be broken.Admission to university, central clearing house, federalism, federal education system

Effective Profit Taxation and the Elasticity of the Corporate Income Tax Base: Evidence from German Corporate Tax Return Data

We estimate the elasticity of corporate taxable income with respect to the effective corporate tax rate on the basis of a pseudo-panel constructed from corporate tax return micro data for the period 1998-2001, a period which saw the introduction of a major corporate tax reform in Germany. Endogeneity of the effective tax rate is controlled for by an instrumental variable approach. Our instrument for the observed effective corporate tax rate is the counterfactual effective tax rate a corporation would face in a particular period had there be no endogenous change of corporate profits. This counterfactual is obtained from a detailed microsimulation model of the corporate sector based on tax return micro data. We find a statistically significant and relatively large point estimate of the average tax base elasticity, which implies that a reduction of the statutory corporate tax rate would reduce corporate tax receipts less than proportionally due to income shifting activities. We also find some statistically weak evidence for the hypothesis that the tax base elasticity is higher for corporations that may benefit from various forms of tax shields.corporate income taxation, tax base elasticity, micro simulation

Telling the Truth May Not Pay Off

We investigate the matching algorithm used by the German central clearinghouse for university admissions (ZVS) in medicine and related subjects. This mechanism consists of three procedures based on final grades from school ("Abiturbestenverfahren", "Auswahlverfahren der Hochschulen") and on waiting time ("Wartezeitverfahren"). While these procedures differ in the criteria applied for admission they all make use of priority matching. In priority matching schemes, it is not a dominant strategy for students to submit their true preferences. Thus, strategic behaviour is expected. Using the full data set of applicants, we are able to detect some amount of strategic behaviour which can lead to inefficient matching. Alternative ways to organize the market are briefly discussed.Matching, university admissions, strategic behaviour

Do Tuition Fees Affect the Mobility of University Applicants?: Evidence from a Natural Experiment

Several German states recently introduced tuition fees for university education. We investigate whether these tuition fees influence the mobility of university applicants. Based on administrative data of applicants for medical schools in Germany, we estimate the effect of tuition fees on the probability of applying for a university in the home state. We find a small but significant reaction: The probability of applying for a university in the home state falls by 2 percentage points (baseline: 69%) for high-school graduates who come from a state with tuition fees. Moreover, we find that students with lower high-school grades react more strongly to tuition fees. This might have important effects on the composition of students across states.mobility of high-school graduates, tuition fees, natural experiment

Corporate taxation and investment: Explaining investment dynamics with firm-level panel data

Using a firm-level panel data set I assess whether dynamic models of investment provide an empirically fruitful framework for analyzing tax effects on changes in capital stock. In particular I estimate a one-step error correction model (ECM) complementing the usual estimation of a distributed lag model. A correction term accounts for non-random sample attrition, which has not been considered in previous studies on investment even though most (if not all) panel data sets on firms are incomplete. Both, ECM and distributed lag model, suggest that user cost of capital and output have an economically and statistically significant influence on capital formation. In the ECM, however, estimates are larger in size and match theoretical predictions more closely. My preferred estimate of -1.3 implies that a decrease in the user cost of capital by 10 percent will increase the firm's capital stock by 13 percent, on average. Taking my elasticity estimate to the Corporate Tax Reform 2008 I would expect that the reform only slightly increases capital stock, since the rather strong reduction in corporate income tax rate was partly compensated for by stricter depreciation allowances. Investment dynamics appear to be crucial for the coefficients of cash flow variables in investment equations. While cash flow effects are present in the (firstdifferenced) distributed lag model, they vanish in the ECM. This leads me to conclude that well documented cash flow effects point at dynamic misspecification in previous studies. --Taxation,Business investment,User cost of capital,Dynamic specification

Sharing the burden: Empirical evidence on corporate tax incidence

This study assesses the burden of capital income tax passed onto labor through wage bargaining over economic rents, using estimations based on a unique pseudo-panel data set from Germany for the period 1998 to 2006. Tax return data cover the universe of corporations subject to corporate income tax, and labor market variables reflect the full record of employees covered by Social Security. We find that wage bargaining after a reduction in tax rates does not increase the wage bill if employment effects neglected by previous empirical studies are taken into account. Any increase in the total wage bill by higher wage rates set is equally compensated for by lower levels of employment. If adjustments in employment due to the increased user cost of capital are taken into account, a cut in corporate income taxes by 1 euro increases the wage bill by 0.47 euro. The identification of these effects comes from variation in the firm-specific average corporate tax rate across firms and over time resulting from two substantial tax reforms. The endogeneity of the firmspecific tax rate is controlled for by an instrumental variable approach. The instrument for the observed average tax rate is the counterfactual tax rate that a corporation would have faced in a particular period, had there been no endogenous change of its tax base, constructed using a detailed microsimulation model. --tax incidence,wage determination,corporate income taxation,corporate tax return data