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on Public Economics |
| By: | Alessandro Ferrari (Department of Economics, University of Zurich & CEPR); Sébastien Laffitte (THEMA, CY Cergy Paris University); Mathieu Parenti (Paris School of Economics, INRAE, CESifo & CEPR); Farid Toubal (Université Paris-Dauphine, CEPII, CESifo & CEPR) |
| Abstract: | International taxation rules are widely regarded as outdated, enabling multinational corporations to exploit loopholes and shift profits to tax havens. This paper explores how international tax reforms can address profit shifting and shape real income and welfare across countries. We propose a model of corporate tax avoidance that separates profits generated by real economic activities from paper profits shifted to tax havens. The model introduces ’triangle identities’ to estimate bilateral profit-shifting flows. Using macro- and firm-level data, we estimate that the elasticity of paper profits is three times greater than that of the tax base. Applying the model to global minimum tax reforms, we find that these policies improve welfare in two ways: by increasing tax revenues to support public goods and by reducing incentives for tax competition. We identify the optimal minimum tax rate under different scenarios of taxing rights allocation. Finally, our analysis shows that unilateral destination-based cash-flow tax reforms can have either positive or negative welfare effects, with outcomes depending significantly on trade imbalances. |
| Keywords: | Profit Shifting; Tax Avoidance; Tax Havens, International Tax Reforms; Minimum taxation; DBCFT; Multinational firms |
| JEL: | F23 H25 H26 H32 H73 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:dbp:wpaper:011 |
| By: | Tomáš Boukal (Charles University); Petr JanskyÌ (Charles University); Miroslav PalanskyÌ (Charles University and Tax Justice Network) |
| Abstract: | We develop a methodology to decompose the tax revenue impact of the global minimum tax introduced in 2024 into several components and quantify its potential impact on profit shifting. We apply it to 34 thousand multinational-country observations from tax returns, financial statements and country-by-country reports of all multinationals active in Slovakia. We find that the global minimum tax has the potential to decrease profit shifting by most multinationals, which are on average likely to pay higher effective tax rates in most countries worldwide post-reform. We find that Slovak corporate tax revenues will increase by 4%, with half of the increase due to its minimum top-up taxes. The other half of the increase is corporate income tax on profits that will no longer be shifted out of the country. We expect the global minimum tax to target 49% of previously shifted profits. |
| Keywords: | Global minimum tax, profit shifting, multinationals, tax avoidance |
| JEL: | H25 H26 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:dbp:wpaper:025 |
| By: | Rishi R. Sharma; Joel Slemrod; Michael Stimmelmayr; John D. Wilson; Peter Choi |
| Abstract: | Dual-regime business tax systems typically subject smaller firms to an output (turnover) tax and larger firms to a profit (corporate) tax. Despite their prevalence, there is little formal analysis of their optimal design. This paper addresses this gap by developing a theoretical framework to analyze the optimal tax parameters and the relative performance of two types of dual-regime systems: threshold and minimum tax systems. We show that either type of dual regime system can yield lower social costs than a single regime system. Using parameter values from recent empirical studies, we also show that a generalized minimum tax system we propose would outperform other dual regime systems under most parameter values. These findings carry important policy implications, particularly as many countries currently employ either threshold or minimum tax systems, but none have yet implemented a generalized minimum tax. |
| Keywords: | dual-regime tax system, output tax, profit tax, bunching |
| JEL: | H25 H21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11962 |
| By: | Jules Ducept (EU Tax Observatory, Center for Economics at Paris-Saclay); Evangelos Koumanakos (Hellenic Open University); Panayiotis Nicolaides (EU Tax Observatory, Paris School of Economics) |
| Abstract: | Using a quasi-experimental setting, we document that corporations decrease declared profits and corporate income taxes in response to an increase in the VAT rate. In an attempt to raise tax revenue during the Greek economic crisis, a 16% VAT rate, which existed for historicopolitical reasons in Greek islands, was harmonised to the national 24% rate. We combine tax filings with Orbis and ICAP data that enable us to geolocate corporations and to construct comparable groups based on locations in or out of the preferential rate. Counteracting the reform’s intended effect, declared profits decreased by 28% and corporate income taxes by 34% on a permanent basis. Macroeconomic factors and a fall in reported revenue cannot fully explain this decrease. Pervasive tax evasion in the Greek islands, where corporations might have an opportunity to adjust profits, offers a plausible explanation of the magnitude of responses. |
| Keywords: | Value-Added Tax; Corporate Income Tax; Greek Islands; Tax Evasion |
| JEL: | H25 H26 H32 H61 L83 |
| Date: | 2023–12 |
| URL: | https://d.repec.org/n?u=RePEc:dbp:wpaper:020 |
| By: | Kang, Jong Woo (Asian Development Bank); Tolin, Lovely (Asian Development Bank) |
| Abstract: | How well raising tax rates can succeed for an economy intent on increasing tax revenue and narrowing the tax-to-GDP-ratio gap with other economies depends on its ability to meet certain conditions. This paper investigates these conditions and demonstrates that expanding the tax base as a proportion of GDP, either through a tax rate increase or rationalizing loopholes and tax expenditure, is crucial if efforts to increase tax revenues are to be effective. We test this theoretical finding through empirical analysis, including the Instrumental Variables—Two-Stage Least Squares (IV-2SLS) approach, and show how broadening the tax base is critical not only for increasing tax revenues but also for ensuring that an increase in the tax rate expands fiscal revenue. The findings highlight the importance of a balanced approach in tax policy design to achieve revenue goals while maintaining economic efficiency. |
| Keywords: | tax rate; tax revenue; tax base ratio; direct tax |
| JEL: | H20 H24 H26 |
| Date: | 2025–07–11 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:0790 |
| By: | Winter, Richard (University of Mannheim); Doerrenberg, Philipp (University of Mannheim); Eble, Fabian (University of Mannheim); Rostam-Afschar, Davud (University of Mannheim); Voget, Johannes (University of Mannheim) |
| Abstract: | We provide novel evidence on the incidence of business taxes using comprehensive survey and experimental data from German firms. Leveraging randomized variation in hypothetical tax changes, we find that the incidence of profit taxes is highly asymmetric. Tax decreases are more likely to benefit workers and stimulate investment, whereas tax increases tend to be passed on to consumers through higher prices and absorbed by firm owners through reduced profit distributions. Moreover, by varying the magnitude of the tax changes, we demonstrate that worker incidence increases with the absolute size of the tax change, partially offsetting the burden on firm owners. |
| Keywords: | investment, firm behavior, tax incidence, corporate tax, payout, wages |
| JEL: | D22 H00 H22 H25 J23 J30 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17983 |
| By: | Sébastien Laffitte (THEMA, CYU Cergy Paris University) |
| Abstract: | I investigate the determinants and consequences of the development of tax havens using a novel database that tracks the creation and development of offshore institutions in 48 tax havens. After describing the development of tax havens in the 20th century and several key empirical patterns, I explore their causal determinants. Building on the idea that tax havens are the suppliers in the market for offshore services, I show that demand shocks explain why countries become tax havens. I also find that competition shocks explain why tax havens update their regulations. This reaction is facilitated by the diffusion of legal technologies between tax havens. Finally, I show that becoming a tax haven generates GDP per capita gains and sectoral reallocation in countries adopting this status. In return, the tax structure of non-haven countries is affected by the rise of tax havens, resulting in an increased tax burden on labor relative to capital. |
| Keywords: | Tax Havens, Taxation, Regulatory Competition, International Taxation, Tax Avoidance, Tax Evasion |
| JEL: | H26 H73 H87 F39 N40 |
| Date: | 2024–03 |
| URL: | https://d.repec.org/n?u=RePEc:dbp:wpaper:022 |
| By: | Sarah Clifford; Jakob Miethe; Camille Semelet |
| Abstract: | This paper characterizes profit shifting behavior across the size distribution of multinational enterprises (MNEs) to evaluate the targeting of the recently introduced Global Minimum Tax (GMT). Using German microeconomic administrative data with no reporting gaps for tax havens, we first document reductions in tax payments after tax haven subsidiaries are added to a group and confirm their outsized productivity. As group size increases, so does the likelihood of including tax haven subsidiaries. Second, we introduce a new methodology to estimate shifted profits at the group level and find an exponential group size gradient in profits shifted to tax havens. A total of EUR 19 billion was shifted to tax havens by German MNEs in 2022. Large groups targeted by the GMT account for 95% of this amount. While this is mainly a function of their size, we also document a positive gradient in profit shifting aggressiveness relative to employment. Third, we relate revenue potential from taxing excess profits in low-tax jurisdictions to compliance costs of the GMT, using a 15% benchmark rate. For groups currently covered by the GMT, revenue gains significantly dominate costs, while extending coverage to additional groups yields only modest net gains. Our results support policy consistency of the GMT in the face of recent unilateral challenges. |
| Keywords: | global minimum tax, multinational enterprises, profit shifting |
| JEL: | H26 G38 F34 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11975 |
| By: | Deng, Guoying; Du, Pengcheng; Hernandez, Manuel A.; Xu, Shu |
| Abstract: | This paper examines the association between corporate income taxes and labor market informality. We present a theoretical framework showing that a higher tax enforcement can push firms to pass on the burden to workers by reducing their social security compliance as well as downsizing and lowering wages. The model propositions are tested using a regression discontinuity design that exploits a national corporate tax reform in China. We find that for every one percentage point increase in the effective tax rate, firms reduce their probability of making basic social security contributions by 0.8%, their compliance rate by 1.4 percentage points, and the probability of making supplementary contributions by 0.6%, while the number of workers and wages fall by 4.4% and 0.7%, respectively. We observe that the effects are more salient among firms privately owned and controlled, large businesses, and in locations where social security contributions are directly collected by the social security administration. The findings suggest that workers not only bear part of the higher corporate taxes faced by firms, but an increase in firms’ tax burden contributes to social security evasion and informality in labor markets. JEL Codes: H32, H55, J30, J23, H25 |
| Keywords: | taxes; labour market; social security; remuneration; China; Asia; Eastern Asia |
| Date: | 2024–03–18 |
| URL: | https://d.repec.org/n?u=RePEc:fpr:gsspwp:140480 |
| By: | Rabah Arezki; Frederick van der Ploeg; Gregoire Rota-Graziosi; Văn Đạo Lê; Rick van der Ploeg |
| Abstract: | The introduction of the Value Added Tax (VAT) has been widely perceived as a successful instrument, boosting government revenue and stimulating industrialization. However, in countries that are heavily dependent on exports of natural resources the introduction of the VAT has led on average to lower tax revenues and did not stimulate industrialization. The VAT thus did not help these countries to diversify away from the natural resource sector contrary to its promise. The results indicate a novel channel for the resource curse hinging on the interaction between economic structure and the design of tax systems. |
| Keywords: | natural resource, tax, industrialization, value added tax |
| JEL: | H25 O13 O14 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11967 |
| By: | Delis, Manthos D.; Laeven, Luc; Ongena, Steven; Delis, Fotis |
| Abstract: | We provide estimates of profit shifting for over 2 million firm-year observations in 100 countries over the period 2009–2020. Employing nonparametric estimation techniques within a mainstay model of profit shifting, we examine how the profits of both parent and subsidiary firms within a multinational group respond to marginal changes in the composite tax indicator. The key advantage of this approach is that it yields firm-year estimates of profit shifting. Multinational firms engage in extensive profit shifting by maintaining affiliates in low-tax countries and zero-tax havens. Multinational groups with an ultimate tax-haven owner exhibit the largest profit response to tax incentives. Our new database opens important avenues for analyzing the sources and effects of profit shifting. JEL Classification: F23, H25, H26, H32, M41 |
| Keywords: | global sample, multinational enterprises, nonparametric estimation, profit shifting, tax arbitrage |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253071 |
| By: | Gallemore, John; Hollander, Stephan (Tilburg University, School of Economics and Management); Jacob, Martin; Zheng, Xiang |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:tiu:tiutis:d8ef8d1e-5396-469a-be6c-32ea43b2949c |
| By: | Margarita Lopez Forero (Banque de France, Université Paris-Saclay - Univ Evry, EPEE); Benjamin Michallet (Paris School of Economics) |
| Abstract: | This paper provides causal evidence on how multinational enterprises’ (MNEs) presence in tax havens translates into job cuts in France following the 2006 European Court of Justice (ECJ) judgement on the Cadbury-Schweppes case, which weakened member States’ controlled foreign company rules (CFC). Using French firm-level data over 2001 and 2014 we show that this weakening in European Anti-tax avoidance rules generates a sharp decline in employment in France in European MNEs having a pre-judgement presence in a European tax haven. We show that treated MNEs lose about 6% of their local employment after the ECJ decision. The effects are mainly concentrated in highly qualified workers and white collars (5% decline for each category). An event-study design shows that no effects are found for MNEs without a pre-judgement presence in a European tax haven, suggesting that it is the weakening in the CFC rules that fosters job cuts at home. Two plausible explanations for these findings are linked to: i) a decline in the cost of opacity allowing firms to restructure and carry out otherwise expensive mass layoffs in France and ii) more stringent rules specifically affecting †wholly artificial arrangements†(i.e. pure letter boxes), which increase the need to comply with substance rules and justify a presence in a European tax haven. |
| Keywords: | Tax Havens, Freedom of Establishment, Employment, Mass layoffs, Economic Substance |
| JEL: | D33 F23 H26 H87 O47 |
| Date: | 2024–02 |
| URL: | https://d.repec.org/n?u=RePEc:dbp:wpaper:021 |
| By: | Vidar Christiansen |
| Abstract: | The paper analyses commodity taxation in an economy where a good can be recycled. Consumers deliver units of a used good to a reuse operator, who sells the good in a second-hand market after some processing. Two regimes are considered. One is a pure market setting where the reuse operator pays consumers for the used good. The alternative is a regime where the supply of used goods to the reuse operator is based solely on charitable donations. Taxes are set to achieve social efficiency. In the market regime the recycled good should be taxed at a reduced rate, which is increasing in the marginal processing cost of the operator. In the charity regime there is no case for deviating from uniform taxation. |
| Keywords: | commodity taxation, recycling, charitable donations |
| JEL: | H21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11969 |
| By: | Carolina Ulloa-Suárez; Oscar M. Valencia; Jorge Guerra; Gustavo Sánchez |
| Abstract: | This paper investigates whether compliance with fiscal rules promotes public debt sustainability. Building on an extended theoretical framework of fiscal reaction functions to incorporate the impact of compliance, and leveraging newly available crosscountry compliance data, we assess whether governments that adhere to rules adjust their primary balances more strongly in response to rising debt and benefit from lower growth-adjusted interest rates. Focusing on two regions with contrasting institutional contexts, we find five key results. First, annual compliance strengthens fiscal adjustment in the European Union (EU) but not in Latin America and the Caribbean (LAC). Second, only sustained compliance improves debt responsiveness in both regions, especially in LAC. Third, the effect varies by rule type: all categories matter in the EU, while only expenditure rules are robust in LAC. Fourth, those effects remain even with high debt levels. Finally, sustained compliance reduces growth-adjusted interest rates in both regions, easing fiscal constraints. These findings suggest that compliance alone is not sufficient—its effectiveness depends on credibility, institutional setting, and persistence over time. |
| Keywords: | Public Finances, Sustainability, Fiscal rules, Compliance. |
| JEL: | E62 H61 H68 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ulp:sbbeta:2025-23 |