Behavioural Responses to Corporate Profit Taxation

This paper examines behavioural responses by companies to changes in profit taxation in their home country. The elasticity of tax revenue with respect to changes in the corporation tax rate are decomposed into a variety of responses. As well as distinguishing real from profit shifting responses, it is important to separate the responses of gross profits from those of deductions (such as claims for past or current losses) where these are endogenously related to gross profits declared at home. This endogenous response can be expected to differ over the business cycle, which can be important for empirical estimates of aggregate behavioural responses especially, but not exclusively, during cyclical downturns. It is suggested that the revenue elasticity can be expected to be asymmetrical between periods of above- and below trend growth, arising from the asymmetric treatment of losses by the tax function.