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Michael P. Devereux University of Warwick

The Impact of Taxation on the Location of Capital, Firms and Profit: a survey of empirical evidence. Michael P. Devereux University of Warwick. Plan of talk. Introduction to ETPF Research Programme Setting the scene for Phase 1 research:

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Michael P. Devereux University of Warwick

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  1. The Impact of Taxation on the Location of Capital, Firms and Profit:a survey of empirical evidence Michael P. Devereux University of Warwick

  2. Plan of talk • Introduction to ETPF Research Programme • Setting the scene for Phase 1 research: • Previous economic research on the impact of taxes on flows of capital, firms and profit

  3. ETPF Aims and Objectives • Undertake high quality economics research on taxation and international business, with European researchers • Publicise research results • Stimulate research activity – especially empirical - in this area

  4. ETPF: Initial 3 phases of research • Positive Economics • How do real and financial international flows respond to taxes? • Welfare Economics • How does inward investment affect welfare of domestic residents ? Do governments compete with each other? • Tax Design • What would be the effects of alternative forms of taxation?

  5. Phase 1: Capital flows and investment • Taxes and the size of the foreign-owned capital stock: which tax rates matter? • Michael Devereux, Ben Lockwood • The impact of non-profit taxes on foreign direct investment: evidence from German multinationals • Thiess Buettner, Georg Wamser

  6. Phase 1: Financial policy and the location of profits • Capital structure and international debt shifting in Europe • Harry Huizinga, Luc Laeven, Gaetan Nicodeme • Profit shifting the EU: evidence from Germany • Alfons Weichenrieder

  7. Phase 1: Other Projects • A survey of existing evidence of the impact of taxes on flows of capital, firms and profits • Michael Devereux, Giorgia Maffini • Corporate income taxes in the EU: an economic assessment of the role of the ECJ • Stephen Bond, Malcolm Gammie, Socrates Mokkas

  8. Phase 2: Corporation tax and labour 1. Do higher corporate taxes affect the demand for labour, and hence unemployment? • Ruud De Mooij, University of Rotterdam 2. How far are corporation taxes passed on in lower wages? • Michael Devereux and Giorgia Maffini, University of Warwick

  9. Phase 2: Corporation tax revenue and tax competition 3. Is there evidence of competition over non-profit taxes paid by business? • Michael Pfaffermayr, University of Innsbruck 4. Why have corporation tax revenues remained so high, when tax rates have fallen so far? • Clemens Fuest, University of Köln

  10. Phase 2: CCCTB Proposal • Can a common consolidated corporate tax base reduce variation in effective tax rates across EU? • Michael Devereux, University of Warwick

  11. Survey of previous Phase 1-type empirical work • Very little research before 1990 • Most research uses US data • and sponsored by NBER or ITPF

  12. Big issues for empirical research on effects of taxes on behaviour • What should be examined? • what is important for policy? • What level of data is available? • aggregate data; consolidated data on companies; data on affiliates • What are the appropriate measures of taxation? • marginal or average; forward-looking or backward-looking

  13. What should be examined (1)? • Total Capital Stock What capital flows are important? • Foreign direct investment (FDI)? • Financial flows only; and include acquisitions • Foreign portfolio investment (FPI)?

  14. What should be examined (2)? • Multinationals Do multinationals generate economic benefits? • higher productivity, higher wages, positive effects on domestic firms? If so, then their activities should be studied: • Where do they locate? • How much do they invest? • How much tax do they pay?

  15. Data on capital flows,profit and finance • Aggregate FDI • Bureau of Economic Analysis / US Treasury • Data on foreign affiliates of US multinationals by country / industry • tax return data (US Treasury); • Consolidated financial accounts • Geographic segment of Compustat / Datastream

  16. Microeconomic data • Unconsolidated data on affiliates, with ownership • Individual-level BEA data (US) • Bundesbank (Germany) • Amadeus (Europe) • Permits more detailed analysis of individual decisions

  17. Which effective tax rate ? 1 LOCATION CHOICES • Firms choose option with highest post-tax profit • tax measured by an effective AVERAGE tax rate 2 LEVEL OF INVESTMENT • Firms invest up to marginal project which breaks even • tax measured by an effective MARGINAL tax rate • LOCATION OF PROFIT • Firms can reduce tax liabilities by locating profit in low tax jurisdictions • tax measured by STATUTORY tax rate (and possibly withholding taxes)

  18. Measuring effective tax rates Forward-looking • Based on hypothetical investment project • Can measure AVERAGE and MARGINAL • Only broad tax parameters typically used Backward-looking • Based on data on tax payments and profit • Using firm level or aggregate data • Depend on past and current decisions

  19. Non-profit taxes ? Largely ignored in previous literature • For good reasons? • if sales taxes passed on to consumers • if income taxes borne by labour • then they should not affect location and investment decisions • Measurement

  20. Broad results on location of capital • Taxes do have some effect • But estimates vary considerably; cannot summarise all results into a single elasticity • For future research: • Need to distinguish more carefully impact of different elements of tax on different types of decision • Need to compare across countries

  21. Today’s papers Examine: • Impact of corporation tax on aggregate investment in host countries by US multinationals • Differentiate impact of effective average tax rate (for location choice) and effective marginal tax rate (for investment) • Role of non-profit taxes on location and investment decisions of German multinationals

  22. Broad results on financial policy and location of profit • Again, taxes have some effect • On rate of profit and financial behaviour • But, again, estimates vary considerably • For future research • Broadly, research has been more careful in developing specific hypotheses and tests • But limited by available data: opportunity has arisen to examine impact of tax in different settings, across countries

  23. Today’s papers Examine • whether rates of profit in German parents and subsidiaries are correlated with tax rates in other countries • the extent to which host country tax rates affect the use of debt in European affiliates of multinationals

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