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International Tax and Public Finance
Published in:

01-10-2013

Corporate tax competition between firms

Authors: Simon Loretz, Padraig J. Moore

Published in: International Tax and Public Finance | Issue 5/2013

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Abstract

Firms’ tax planning decisions, similar to their other operational decisions, are made in a competitive environment. Various stakeholders observe the tax payments and evaluate these against the relevant peer group. This implies firms might not simply minimise their tax burden, but also consider their competitors behaviour when deciding about tax planning. Empirically this creates interdependencies in the tax planning activities of firms. Introducing the concept of a reputational loss we show the positive interdependence in a theoretical model and test it in a spatial econometric model. Empirical evidence suggests that benchmarking takes place both within countries and within industries, however for the latter it is important to include firms in large non-EU OECD countries.
next article Pollution and reforms of domestic and trade taxes towards uniformity

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Appendix
Available only for authorised users
Footnotes
1
Throughout the paper ETR denotes various ratios of tax payments or liabilities to pre-tax profit. For a survey and discussion of early empirical evidence, see Hines (1999).
 
2
The big exception is the accounting literature where a number of recent papers have investigated tax aggressiveness. See Hanlon and Heitzman (2010) for a comprehensive survey.
 
3
See Slemrod (2007) for a review of the literature on personal income tax evasion.
 
4
See Freedman et al. (2009) for a discussion of this risk rating.
 
5
For further evidence for this hypothesis see Desai et al. (2007) and Desai and Dharmapala (2009).
 
6
See Rego (2003) for a summary and discussion of this literature.
 
7
See Zimmerman (1983) and Omer et al. (1993) for a discussion and early evidence for the political cost hypothesis.
 
8
Collins and Shackelford (1999) find only inconclusive evidence for this hypothesis.
 
9
See www.​theguardian.​co.​uk/​taxgap. For further examples of political pressure from the wider public, see the publications of Citizen for Tax Justice (United States) or Tax Justice Network International.
 
10
See also Moore (2008) for a different theoretical approach to tax benchmarking, where managers optimise the ETR in order to avoid being voted off by the shareholders.
 
11
However, the results do not change qualitatively if the reputational loss is tax-deductible. The calculations are available from the authors by request.
 
12
See the working paper version of this paper for a version which uses ORBIS, provided by Bureau van Dijk, which covers more companies with less detailed accounting information.
 
13
In particular, the requirement to pay the taxes in installments upfront may lead to a negative correlation between the actual tax burden and the tax payable in the case of losses. We are grateful to an anonymous referee for highlighting this problem. The results using the ETR payable measure can be found in the Online Appendix at the authors’ website.
 
14
This also includes current liabilities; see also Huizinga et al. (2008) for a similar approach.
 
15
We are grateful to Dhammika Dharmapala for pointing us in this direction.
 
16
We also eliminate all observations with a leverage bigger than unity. A complete description of the cleaning process is available from the authors upon request.
 
17
The corresponding descriptive statistics for the full unbalanced sample are very similar and are available in the Online Appendix on the authors’ website.
 
18
See Overesch and Rincke (2009) for a discussion of this problem.
 
19
The results are qualitatively similar without the size weighting. The full set of results is included in the Online Appendix on the authors’ website.
 
20
See Anselin (1988) for a discussion about row standardisation.
 
21
See Brueckner (2003) for a discussion of this issue.
 
22
See also Anselin et al. (2008).
 
23
See Cowling and Waterson (1976) or Machin and Van Reenen (1993) for evidence on the connection between market share, industry concentration and profitability.
 
24
See also Kelejian and Prucha (2010) for a more detailed discussion of the problem of unbalanced data in a spatial setting.
 
25
An additional complication lies in the variety of accounting standards which are used by firms. While we aim to control for different accounting standards by the inclusion of firm fixed effects, time fixed effects and the inclusion of the statutory corporate tax which varies at the country-year level, there might be other idiosyncratic effects associated with the accounting standards.
 
26
An alternative approach would be to (partly) collapse the panel into a cross section, which would mitigate the time dimension issue of the loss carry-forward. In fact, we have collapsed the firm data into four points of time and reran the regression on this sample. The results change only quantitatively and a similar conclusion can be drawn.
 
27
For example, a common shock could be enforcement strategies which vary across jurisdictions as discussed in De Waegenaere et al. (2006).
 
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Metadata
Title
Corporate tax competition between firms
Authors
Simon Loretz
Padraig J. Moore
Publication date
01-10-2013
Publisher
Springer US
Published in
International Tax and Public Finance / Issue 5/2013
Print ISSN: 0927-5940
Electronic ISSN: 1573-6970
DOI
https://doi.org/10.1007/s10797-012-9248-6

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