tax competition: theory and empirical evidence michael p. devereux centre for business taxation...
Post on 27-Mar-2015
220 Views
Preview:
TRANSCRIPT
TAX COMPETITION: THEORY AND EMPIRICAL EVIDENCE
Michael P. Devereux
Centre for Business Taxation
University of Oxfordcopyright rests with the author
Plan
• A brief introduction to the theory– should we expect competition? – should we expect a “race to the bottom”?– can we distinguish “beneficial” and “harmful”
tax competition
• Evidence of tax competition– Trends in tax rates and revenues– Econometric evidence
• Conclusions
Basic tax competition theory
• Capital mobile across countries, but labour immobile
• Governments provide a public good paid for by a source-based tax on the return to capital
• They choose a tax rate to reflect (a) benefits of higher public good provision
(b) loss of capital abroad
• Tax rate lower than in a closed economy
Questionable assumptions
• Labour not mobile?
• No other taxes available to governments?• Labour income tax • VAT• Residence-based capital income tax
• No imperfect competition, economic rent, discrete choices
• No publicly-provided goods for production
Incidence & Some Implications
• Taxes on capital (in small open economy) cannot reduce the post-tax rate of return to owners
• So are effectively borne by domestic residents
• Better to tax them directly and avoid distortion to location of capital– ie. better NOT to tax capital income
Extensions to model (1)
Competition over discrete location choices, where firms earn economic profit
1. If firms want to locate near market, large countries attract investment, though they may have to pay a subsidy
2. If firms want to locate away from their competitors, governments can raise (some) tax without distorting investment
Extensions to model (2)
• 3 levels of decision:– Where to locate a new facility – depends on average
tax rate– How much to invest – depend son marginal tax rate– How much profit to shift to lower-taxed countries –
depends on statutory tax rate
• Governments could compete over any of these 3 tax rates– should depend on mobility of firms v capital v profit
Is competition harmful or beneficial? (1)
Compared to what ?– Closed economy ?– Partially co-ordinated group of countries ?
• eg. in capital taxes, but not labour taxes
– Fully co-ordinated group of countries ?– Countries globally co-ordinated ?
Is competition harmful or beneficial? (2)
• Competition may be generally good, but– taxes not like ordinary markets; and governments
provide goods that the private sector cannot– Is competition over environmental pollution
beneficial? – Competition over only some taxes distort choice of
instruments
• Is a distinction based on competition for firms & capital as opposed to competition for profit ?
Is competition harmful or beneficial? (3)
• All competition acts as a constraint in national policy setting
• If governments act in national interest then real harm is where other countries hurt, eg.– global pollution– preventing other countries raising taxes on capital ?
• But should we tax source-based profit anyway?– arguably not on efficiency grounds; and can use other
instruments for equity ?
Empirical Evidence
Do governments compete? Some possible sources of evidence:
1. Trends in tax rates, and tax reforms
2. Evidence of impact of taxes on business
3. Evidence of impact of foreign taxes on domestic taxes
Average OECD Statutory Corporation Tax Rates
20%
25%
30%
35%
40%
45%
50%
55%19
82
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
median unweighted mean
Statutory corporation tax rates: Old and new member states, 1995-2005
20.0
22.0
24.0
26.0
28.0
30.0
32.0
34.0
36.0
38.0
40.0
1995 1997 1999 2001 2003 2005
15 old member states 10 new member states
Corporation Tax Rate Reductions in EU, 2003-5Reduction (%) Year of reform
Austria 34 to 25 2005
Belgium 39 to 33 2003
Cyprus 25 to 15 2003
Czech Republic 31 to 28 to 26 2004, 05
Estonia 26 to 24 2005
France 35.4 to 33.8 2005
Greece 35 to 32 2005
Hungary 18 to 16 2004
Italy 36 to 34 to 33 2003, 04
Latvia 22 to 19 to 15 2003, 04
Netherlands 34.5 to 31.5 2005
Poland 28 to 27 to 19 2003, 04
Portugal 30 to 25 2004
Slovakia 25 to 19 2004
EU Statutory corporation tax rates, 2005
0
5
10
15
20
25
30
35
40
45
But do trends tell us anything ?
• An implicit hypothesis that (a) globalisation and hence (b) competition have been increasing, but– also requires evidence of pattern of increased
mobility– theory says little about competition with
imperfect mobility– tax rates may have moved for other reasons– tax revenues tell a different story
Outward FDI: US and UK
0
50
100
150
200
250
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Year
2000
$bn
UK US
But do trends tell us anything ?
• An implicit hypothesis that (a) globalisation and hence (b) competition have been increasing, but– also requires evidence of pattern of increased
mobility– theory says little about competition with
imperfect mobility– tax rates may have moved for other reasons– tax revenues tell a different story
OECD Corporation Tax Revenues as % of GDP 1965-2004
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%19
6519
6619
6719
6819
6919
7019
7119
7219
7319
7419
7519
7619
7719
7819
7919
8019
8119
8219
8319
8419
8519
8619
8719
8819
8919
9019
9119
9219
9319
9419
9519
9619
9719
9819
9920
0020
0120
0220
0320
04
GDP weighted average unweighted average
Implicit Tax Rates in Capital: Old and New Member States 1995 - 2003
10
15
20
25
30
35
1995 1996 1997 1998 1999 2000 2001 2002 2003
%
15 old member states 10 new member states
2. Evidence of impact of taxes on business behaviour (1)
• Plenty of empirical evidence of effect of taxes, affecting – location of firms– direct flows of capital
• Studies use a variety of measures of both capital and tax rates – and hence estimates of elasticities vary widely
2. Evidence of impact of taxes on business behaviour (2)
• Also evidence of effects of tax on the location of profit, eg:– Repatriation of dividends to parent companies– Use of debt in high-tax subsidiaries– Transfer prices– Comparison of profit across countries
Corporate Taxable Income as % GDP, relative to Statutory Tax Rates, 2004
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
10 15 20 25 30 35 40
Statutory Tax Rate
Cor
pora
te T
axab
le In
com
e as
% o
f GD
P
But evidence of tax competition ?
One more stage required before governments should respond to concerns of effects of tax:
• What are the welfare consequences of the induced behaviour of firms? eg:
– Is the aggregate capital stock lower? – Are productivity and wages lower?
• Relatively little research on these issues
3. Evidence of impact of foreign taxes on domestic taxes
Direct examination of relationship between tax rates
• very little research
• difficulty in identifying appropriate tax rates– eg. implicit rates (or revenue/GDP) may show
common movements due to correlation in economic cycle across countries
One study
Devereux, Lockwood & Redoano (2005)• examine effective marginal tax rate and statutory
tax rate in OECD countries• find a significant effect on the statutory rate of
statutory rate in other countries– Consistent with competition for firms (via the effective
average tax rate)– Consistent with competition for profit
• Overall, results suggest significant competition, which more than explains reforms up to 2000
Conclusions (1)
Governments do compete in statutory corporation tax rates
• EU statutory rates of corporation tax have fallen steadily, and go on falling– new member states increasing competition
• But revenues have remained buoyant; can this continue?
Conclusions (2)
Does it matter?
• Depends on what is the “optimal” rate of source-based corporation tax– arguably it is zero anyway– harmonisation of CT may lead to competition in
public services used in production– if harmonisation were possible, why not
consider residence-based tax within the EU?
Or are political considerations paramount?
Conclusions (3)
• Longer term issues arise with increasing labour mobility– less easy to rely on taxes on residents if they
are more mobile– may eventually imply need to restrict labour
mobility, or agreement on income tax rates
top related