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Corporate tax policy and incorporation in the EU

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Author Info
Ruud A. de Mooij ()
Gaëtan Nicodème

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Abstract

In Europe, declining corporate tax rates have come along with rising tax-to-GDP ratios. This paper explores to what extent income shifting from the personal to the corporate tax base can explain these diverging developments. We exploit a panel of European data on legal form of business to analyze income shifting via incorporation. The results suggest that the effect is significant and large. It implies that the revenue effects of lower corporate tax rates ¯ possibly induced by tax competition ¯ will partly show up in lower personal tax revenues rather than lower corporate tax revenues. Simulations suggest that between 12% and 21% of corporate tax revenue can be attributed to income shifting. Income shifting is found to have raised the corporate tax-to-GDP ratio by some 0.25%-points since the early 1990s.

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Paper provided by CPB Netherlands Bureau for Economic Policy Analysis in its series CPB Discussion Papers with number 97.

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Date of creation: Jan 2008
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Handle: RePEc:cpb:discus:97

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Related research
Keywords: Corporate tax; Personal tax; Incorporation; Income shifting;

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Find related papers by JEL classification:
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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This item is featured on the following reading lists:
  1. European Public Finance (ECON-O-403)
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Goolsbee, Austan, 2004. "The impact of the corporate income tax: evidence from state organizational form data," Journal of Public Economics, Elsevier, vol. 88(11), pages 2283-2299, September. [Downloadable!] (restricted)
  2. Alfons Weichenrieder, 2005. "(Why) Do we need Corporate Taxation?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  3. Michael Devereux & Rachel Griffith & Alexander Klemm, 2004. "Why has the UK corporation tax raised so much revenue?," Fiscal Studies, Institute for Fiscal Studies, vol. 25(4), pages 367-388, December.
  4. Ruud Mooij, 2005. "Will Corporate Income Taxation Survive?," De Economist, Springer, vol. 153(3), pages 277-301, 09. [Downloadable!] (restricted)
  5. Alstadsaeter, Annette, 2003. "The Dual Income Tax and Firms' Income Shifting through the Choice of Organizational Form and Real Capital Investments," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  6. Roger H. Gordon & Joel Slemrod, 1998. "Are "Real" Responses to Taxes Simply Income Shifting Between Corporate and Personal Tax Bases?," NBER Working Papers 6576, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition," Economic Policy, CEPR, CES, MSH, vol. 17(35), pages 449-495, October. [Downloadable!] (restricted)
  8. Gordon, Roger H. & MacKie-Mason, Jeffrey K., 1994. "Tax distortions to the choice of organizational form," Journal of Public Economics, Elsevier, vol. 55(2), pages 279-306, October. [Downloadable!] (restricted)
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  9. Mackie-Mason, Jeffrey K & Gordon, Roger H, 1997. " How Much Do Taxes Discourage Incorporation?," Journal of Finance, American Finance Association, vol. 52(2), pages 477-505, June. [Downloadable!] (restricted)
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  10. Rachel Griffith & Alexander Klemm, 2004. "What has been the tax competition experience of the past 20 years?," IFS Working Papers W04/05, Institute for Fiscal Studies. [Downloadable!]
  11. Clemens Fuest & Alfons Weichenrieder, 2002. "Tax Competition and Profit Shifting: On the Relationship between Personal and Corporate Tax Rates," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  12. Goolsbee, Austan, 1998. "Taxes, organizational form, and the deadweight loss of the corporate income tax," Journal of Public Economics, Elsevier, vol. 69(1), pages 143-152, July. [Downloadable!] (restricted)
    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Florian Woehlbier & Marco Fantini & Beata Heimann & Gaetan Nicodeme & Katri Kosonen & Werner Vanborren & Milan Pein & Stefanie Knoth & Federico Martire & Alessandro Lupi & Monika Wozowczyk & John Verr, 2008. "Taxation trends in the European Union: 2008 edition," Taxation trends 2008, Directorate General Taxation and Customs Union, European Commission. [Downloadable!]
    Other versions:
    • Marco Fantini & Konstantin Lozev & Emanuela Tassa & Florian Woehlbier & Stefanie Knoth & Werner Vanborren & Joanna Piotrowska & Beata Heimann & Milan Pein & Katri Kosonen & Monika Wozowczyk & Anne Pat, 2007. "Taxation trends in the European Union: 2007 edition," Taxation trends 2007, Directorate General Taxation and Customs Union, European Commission. [Downloadable!]
    • Marco Fantini & Paolo Acciari & Emanuela Tassa & Florian Woehlbier & Andrea Beltramello & Claes Hallberg & Lena Frej-Ohlsson, 2006. "Taxation trends in the European Union: 2006 edition," Taxation trends 2006, Directorate General Taxation and Customs Union, European Commission. [Downloadable!]
    • Marco Fantini & Paolo Acciari & Emanuela Tassa & Conrad Turley & Werner Vanborren & Claudius Schmidt-Faber & Lena Frej-Ohlsson, 2005. "Taxation trends in the European Union: 2005 edition," Taxation trends 2005, Directorate General Taxation and Customs Union, European Commission. [Downloadable!]
    • Florian Woehlbier & Marco Fantini & Tatjana Lapunova & Beata Heimann & Gaetan Nicodeme & Katri Kosonen & Doris Prammer & Maya Hristova & Milan Pein & Thomas Hemmelgarn & Werner Vanborren & Alessandro , 2009. "Taxation trends in the European Union: 2009 edition," Taxation trends 2009, Directorate General Taxation and Customs Union, European Commission. [Downloadable!]
  2. Ruud A. de Mooij & Sjef Ederveen, 2008. "Corporate Tax Elasticities A Reader’s Guide to Empirical Findings," Working Papers 0822, Oxford University Centre for Business Taxation. [Downloadable!]
    Other versions:
  3. De Laet, Jean-Pierre & Wöhlbier, Florian, 2008. "Tax burden by economic function A comparison for the EU Member States," MPRA Paper 14761, University Library of Munich, Germany. [Downloadable!]
  4. Dhammika Dharmapala, 2008. "What Problems and Opportunities are Created by Tax Havens?," Working Papers 0820, Oxford University Centre for Business Taxation. [Downloadable!]
    Other versions:
  5. Gaetan Nicodeme, 2009. "Corporate Income Tax and Economic Distortions," Taxation Papers 15, Directorate General Taxation and Customs Union, European Commission, revised Apr 2009. [Downloadable!]
    Other versions:
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