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International Tax and Public Finance

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03-08-2018 | Policy Watch

Corporate income taxes around the world: a survey on forward-looking tax measures and two applications

Authors: Elias Steinmüller, Georg U. Thunecke, Georg Wamser

Published in: International Tax and Public Finance | Issue 2/2019

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Abstract

This study provides a survey on corporate taxes around the world. Our analysis has three main objectives. First, we collect tax data and calculate (forward-looking) effective tax measures for a large sample of countries and recent years. We particularly describe how these measures vary over time and across countries. Second, we augment the country-level information with firm- and industry-level data (providing weights for financial structure and asset composition) to contrast statutory measures at the level of countries with measures accounting for firm- and industry-specific weights. Third, we utilize our new data to (i) estimate Laffer-Curves, i.e., the relationship between statutory tax rate and tax revenue, based on nonparametric as well as parametric specifications; (ii) examine how taxes affect investment in fixed assets at the level of firms. As for the latter, our preferred specification, in which we use a firm-specific effective marginal tax rate to capture tax incentives, suggests an elasticity of \(-\,0.33\).

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Additional changes in tax law affect the way how international business income is taxed. Moreover, some new legislation has been implemented to prevent profit-shifting activities of multinational enterprises.

Another early contribution to the literature on ETRs is Boadway et al. (1984). The approach of the latter paper differs from King and Fullerton (1984) in the sense that it relies on an open economy model. Recent extensions and applications based on this early contribution include, for example, Bazel et al. (2018), and Mintz (2018).

We are aware of the fact that this is a fairly strong assumption. To capture incentive effects, however, forward-looking measures are to be preferred to backward-looking measures, which are based on firms’ operating profits and tax payments stated in the balance sheet. First, backward-looking rates do not comply with the forward-looking nature of investment decisions (Egger et al. 2009b). Second, the amount of taxes paid is strongly affected by tax-planning activities, making backward-looking measures prone to severe endogeneity issues (Fabling et al. 2014).

For a detailed overview on how A is calculated, consider Appendix A.1.

We abstract from taxation at the shareholder level and therefore ignore personal income taxes.

The discount rate is defined as a weighted average of the rates applicable to equity- and debt-financed investment, respectively (see below).

This result, derived from a neoclassical investment model, is equivalent to the results obtained by Devereux et al. (2002) and Egger et al. (2009b) in a cash-flow focused framework.

Note that, for a marginal investment, the EATR is equal to the EMTR. The EATR can hence be interpreted in a way that it summarizes the distribution of tax rates for an investment as long as the latter is profitable, and the EMTR represents the special case of a marginal investment (Devereux and Griffith 1998).

See Appendix A.3, for more details on R and \(R^*\).

ETR measures employing different values for economic depreciation are included in Appendix A.4.

In an Online Appendix to this paper, we provide all statistics and estimates using EMTRs and EATRs setting \(\sigma \) to the conventional values used in previous literature.

We make the assumption of a common ‘market interest rate’ due to (broadly) two reasons. First, a meaningful measure in this regard is not available, also given the fact that many (multinational) firms finance investments partly via internal capital markets (Desai et al. 2004), and it is unclear which interest rates apply to such internal capital. Second, it is not our focus to analyze the effect of variations in interest rates across countries.

When the information from the WCTG is insufficient or counterintuitive, additional sources are considered, including the OECD, IBFD, and World Bank databases as well as tax guides provided by PwC and KPMG.

Most notably, these countries include Germany, Switzerland, Japan, USA, and Canada.

Concerning the allowances for buildings, we always choose the available rate for industrial buildings. Furthermore, we have treated Furniture to be representative for Office equipment if not specified differently.

As data coverage for Intangible fixed assets is particularly poor, we assume a straight-line depreciation scheme for a period of 10 years whenever no information is specified for this asset type, yet data on all other types are available.

A precise definition of what we mean with firm–industry level is given below.

Note that we have collected data on STRs from 1996 to 2016. Although the focus of this survey is on effective tax measures, which have been collected for the time period 2004–2016—for reasons of data availability—we present the STRs for the extended period of time to additionally show a more long-run development which can be compared to previous studies (Devereux et al. 2002; Loretz 2008).

Note that the German STR accounts for the (average) local (municipality) business tax.

In Fig. 18 in Appendix A.5, for each country, we pool the annual \(\textit{STRs}\) over the period from 1996 to 2016 and subtract the global average \(\textit{STR}\) (26.09%) from each country’s time average.

See Appendix A.1 for more information.

Orbis is a commercial database, providing comprehensive balance-sheet data for firms from across the globe. In particular, we make use of 17,024,351 firm observations for the time period 2004 to 2014.

In contrast to Egger and Loretz (2010), who employ the sum of non-current and current liabilities, we think that long-term debt is the relevant measure to be considered in terms of a firm’s investment opportunity. Only non-current liabilities can be harnessed to finance investment projects. The long-term debt-to-total assets ratio, of course, underestimates a firm’s (total) debt ratio, yet seems to be more accurate in the given context.

Fabling et al. (2014) use data from Statistics New Zealand’s Longitudinal Business Database, which combines administrative and survey data on New Zealand firms and provide the asset-type shares based on two-digit ANZSIC96 codes. The latter are very closely related to the commonly used ISIC codes.

Arthur Laffer, economist, and member of Reagan’s Economic Policy Advisory Board (1981 to 1989), became famous for making the argument that the relationship between tax revenue and statutory tax incentives is such that a tax rate between 0% and 100% maximizes tax revenue. Piketty and Saez (2013) argue that economists have known the idea of the inverted U-shaped revenue curve long before, early contributions going back more than 170 years (e.g., Dupuit 1844). Loretz (2008) alike discusses the historical background of the concept, stating that its origin dates back as far as the fourteenth century.

Note that more recent tax revenue data have not been made available.

Most of the previous contributions to the literature have either (i) focused on trends in corporate income tax revenue, without providing a thorough analysis of the sources of the observed variations (Bénassy-Quéré et al. 2000; Gropp and Kostial 2000; Devereux et al. 2002, 2004; Loretz 2008), or (ii) calculated country-specific Laffer-Curves (Trabandt and Uhlig 2011; Strulik and Trimborn 2012).

Very broadly, our paper and Clausing (2007) differ in terms of the following aspects: the observed time periods (1979-2002 vs. 2004-2016), the sample (29 OECD countries vs. 112 countries from all over the world), and the empirical approach.

\({ GROWTH}_{ct}\) is taken from the World Bank’s World Development Indicators (WDI) database and is defined as GDP growth per capita.

Note that the constant in these estimates is not zero. At first glance, this may seem contradictory to theory, which would suggest zero tax revenue at a zero tax rate. However, in a fixed effects regression, this coefficient is not interpretable in a reasonable way (Wooldridge 2010). When it comes to Figs. 15 to 17, where we illustrate the predicted tax revenue curves, we see in fact a nonzero intercept. However, this is justifiable as these figures visualize the predictions from our linear regression model and hence, the model may predict a nonzero tax revenue even with a zero tax rate.

The STR, which does not consider depreciation rules, is the relevant indicator when the goal is to measure incentives in the context of profit shifting.

Note that our sample basically captures information from all unconsolidated balance sheets reported in Orbis for the years 2004 until 2014. We exclude firms operating in the financial and insurance business as well as all firms associated with public administration, as these are often subject to different tax rules and regulation. We finally require that a firm is observed for at least 4 years in our data.

We have chosen control variables in line with the paper by Egger et al. (2014), as far as the respective information was available in Orbis.

A firm in our data is an entity (affiliate) of a multinational enterprise. All j-specific variables are taken from (unconsolidated) balance-sheet information provided for these entities.

While both our estimates are smaller than in Zwick and Mahon (2017), we should also note that the average change in \(NPV_{ct}\) is only -.002 (over all observations in our sample).

Note that, of course, \(EMTR_{jict}^{IND}\) and \(EATR_{jict}^{IND}\) still contain variation at the country level as the industry-specific weights are applied to the respective countries’ tax law variables.

The only difference compared to Devereux et al. (2002) and Egger et al. (2009a) lies in the way we define the NPV of depreciation allowances. In this regard, we follow Egger and Loretz (2010) and separate the NPV of depreciation allowances (A) from the STR (\(\tau \)).

In our estimation approach, the difference in the tax-setting behavior between small and large countries cannot be analyzed in a meaningful way. This is because identification is based on changes in tax rates over time and all cross-sectional differences in country size are removed. This generally implies that in the fixed effects approach, a marginal increase in GDP (which is used to normalize the dependent variable, anyway) cannot be interpreted as the effect of becoming larger. For example, a marginal increase in the GDP of Latvia would not make Latvia a large country. We do not see a way to capture these discrete jumps in the definition of being small.

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Title: Corporate income taxes around the world: a survey on forward-looking tax measures and two applications
Authors: Elias Steinmüller
Georg U. Thunecke
Georg Wamser
Publication date: 03-08-2018
Publisher: Springer US
Published in: International Tax and Public Finance / Issue 2/2019
Print ISSN: 0927-5940
Electronic ISSN: 1573-6970
DOI: https://doi.org/10.1007/s10797-018-9511-6

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