Boehm, Karkinsky, and Riedel complement a small but growing literature on the effect of corporate taxes on R&D investment and patent holdings. They demonstrate that patenting strategies are exploited as a device to transfer income to low-tax jurisdictions. Using data on the population of corporate patent applications to the European Patent Office, they show that the location of R&D investment and patent ownership is geographically separated in a non-negligible number of cases. Moreover, the results here suggest that this geographical split is partly motivated by tax considerations. The authors find that countries that levy low patent income taxes attract ownership of foreign-invented patents, especially those patents that have a high earnings potential. Analogously, inventor countries with high patent income tax rates observe ownership relocations of high-quality patents from their borders. Moreover, the results suggest that the probability for a patent to be owned by a party in a tax haven country significantly decreases if the inventor country has implemented controlled foreign company laws.
Based on existing evidence, we know little of how taxation of small businesses affect the economic activity of their owners. To shed new light on this topic, Harju and Kosonen study the effect of two Finnish tax reforms in 1997 and 1998 on economic growth, employment, and profit margins of small businesses. The reforms affected the income tax burden of business owners by changing the share of income taxed as capital income. The tax changes applied only to noncorporate firms, leaving corporations out. Therefore the authors are able to use difference-in-differences strategy to estimate a causal impact of tax incentives on economic activity of small businesses. The change in incentives grew with the size of the firm, enabling them to study heterogeneous treatment effects. The results imply that lighter taxation leads to a modest increase in turnover and profit margin of firms, but no significant increase in employment.
Scheuer analyzes Pareto optimal non-linear taxation of profits and labor income in a private information economy with endogenous firm formation. Individuals differ in both their skill and their cost of setting up a firm, and choose between becoming workers and entrepreneurs. He shows that a tax system in which entrepreneurial profits and labor income must be subject to the same non-linear tax schedule uses general equilibrium (or "trickle down") effects through wages to indirectly achieve redistribution between entrepreneurs and workers. As a result, constrained Pareto-optimal policies can involve negative marginal tax rates at the top and, if available, input taxes that distort the firms' input choices. However, these properties disappear when a differential tax treatment of profits and labor income is possible. In this case, redistribution is achieved directly through the tax system rather than "trickle down" effects, and production efficiency is always optimal.
Bilateral tax treaties (BTT) are intended to promote foreign direct investment and foreign affiliate activity through double taxation relief. However, BTTs also typically contain provisions that facilitate sharing of tax information between countries intended to curtail tax avoidance by multinational firms. These provisions should disproportionately affect firms that intensively use inputs for which an arms-length price is easily observed, since strategic transfer practices that manipulate tax liabilities are no longer effective with information sharing between countries. Using BEA firm-level data, Blonigen, Oldenski, and Sly are able to separately estimate the impacts of double-taxation relief and sharing of tax information on investment behavior of U.S. multinational firms. They find a significant positive effect of new tax treaties on foreign affiliate activity between member nations that is offset (and even reversed) the more a firm relies on inputs traded on an organized exchange (that is, inputs for which the arms-length price is easily observed). They find these opposing BTT effects for both the intensive margin (sales of existing affiliates) and the extensive margin (entry of new affiliates).
Albanesi studies optimal taxation of entrepreneurial capital with private information and multiple assets. Entrepreneurial activity is subject to a dynamic moral hazard problem and entrepreneurs face idiosyncratic capital risk. Albanesi first characterizes the optimal allocation subject to the incentive compatibility constraints resulting from private information. The optimal tax system implements such an allocation as a competitive equilibrium for a given market structure. Next the author considers several market structures that differ in the assets or contracts traded, and obtains three novel results: first, the intertemporal wedge on entrepreneurial capital can be negative, as more capital relaxes the entrepreneur's incentive compatibility constraints; second, differential asset taxation is optimal --marginal taxes on financial assets depend on the correlation of their returns with idiosyncratic capital risk, which determines their hedging value, and entrepreneurial capital always receives a subsidy relative to other assets in bad states; third, if entrepreneurs are allowed to sell equity, the optimal tax system embeds a prescription for double taxation of capital income- at the firm level and at the investor level.
In addition to the conference paper, the research was distributed as NBER Working Paper w12419, which may be a more recent version.
Huizinga, Voget, and Wagner examine empirically how international taxation affects the volume and pricing of cross-border banking activities for a sample of banks in 38 countries over the period 1998-2008. International double taxation of foreign-source bank income is found to reduce banking-sector FDI. Furthermore, such taxation is almost fully passed on into higher interest margins charged abroad. These results imply that international double taxation distorts the activities of international banks, and that the incidence of international double taxation of banks is on bank customers in the foreign subsidiary country. This analysis informs the debate about additional taxation of the financial sector that has emerged in the wake of the recent financial crisis.
In addition to the conference paper, the research was distributed as NBER Working Paper w18483, which may be a more recent version.
Hines and Park examine the investment effects of tax subsidies for which some assets and not others are eligible. Distortionary tax subsidies concentrate investments in tax-favored assets, thereby reducing the expected pretax profitability of investment and reducing payoffs to bondholders in the event of default. Anticipation of asset substitution encourages lenders to require covenants in bond contracts, which only imperfectly address asset substitution and impose their own distortions on the investment process. The result is that borrowing is made more expensive, which in turn discourages investment. Borrowing rates can react so strongly that aggregate investment may rise very little, or even fall, in response to higher tax subsidies. Bonds issued by U.S. firms in risk of default after the 2002 introduction of bonus depreciation for U.S. equipment investment contained many more covenants than in other periods, a pattern that reversed when bonus depreciation was discontinued after 2004; furthermore, it appears that firms at risk of default borrowed very little during that period.
The notion that the revenue-maximizing corporate tax rate resides in the low-30's derives from several recent papers that have estimated the relationship between corporate tax rates and corporate tax revenues among OECD countries. Kawano and Slemrod challenge this result by reexamining this relationship using a new compilation of changes in corporate tax base definitions for OECD countries between 1980 and 2004. They find that when an appropriate econometric specification is used, the relationship between corporate tax rates and corporate tax revenues is tenuous. The large behavioral response to corporate tax rates perceived in the literature does not obtain when accounting for persistent differences in tax policy and business environments across countries. Instead, they find that certain aspects of the corporate tax base, such as the research and development credit and the taxation of foreign corporations, importantly influence corporate tax revenue receipts.
In addition to the conference paper, the research was distributed as NBER Working Paper w18440, which may be a more recent version.
Edgerton develops and tests the hypothesis that accounting rules mitigate the impact of tax policy on firm investment decisions by obscuring the timing of tax payments. He models a firm that maximizes a discounted weighted average of after tax cash flows and accounting profits. He estimates the weight placed on accounting profits by comparing the effectiveness of tax incentives that do and do not affect them. Invest-
ment tax credits, which do affect accounting profits, have more impact on investment than accelerated depreciation, which does not. This difference in estimated impact is not obviously driven by discounting, cash flow effects, or measurement error. These results thus suggest that accelerated depreciation provisions are less effective than they otherwise would be and that the tax burden on corporate capital could possibly be lower than we would otherwise estimate.
In addition to the conference paper, the research was distributed as NBER Working Paper w18472, which may be a more recent version.
Fuest, Maffini, and Riedel explore the factors determining corporate tax payments in developing countries. Using rich accounting and ownership data on approximately 183,000 firms in 65 developing countries for 1999-2008, they find that large firms face higher marginal and average effective tax rates than smaller firms. Adherence to a multinational group in turn does not play a significant role in determining effective tax payments. The results also suggest that public sector corruption exerts a negative impact on observed effective tax rates.
Egger, Keuschnigg, Merlo, and Wamser develop a theoretical model of multinational firms with an internal capital market. The main reasons for the emergence of such a market are tax avoidance through debt shifting and the existence of institutional weaknesses and financial frictions across host countries. The model serves to derive hypotheses regarding the role of local versus foreign characteristics such as profit tax rates, lack of institutional quality, financial underdevelopment, and productivity for internal debt at the level of a given foreign affiliate. The authors assess hypotheses in a panel dataset covering the universe of German multinational firms and their internal borrowing. Numerous novel insights are gained. For instance, the tax-sensitivity in this dataset is many times higher than common wisdom would suggest. This accrues mainly to the non-selectivity of the sample at hand. Moreover, local and foreign (at other locations of a given affiliate) market conditions matter more or less symmetrically and in the opposite direction. There is a nonlinear trade-off between institutional quality or financial development on the one hand and higher profit tax rates on the other hand, and the strength of this trade-off depends on the characteristics of one location relative to the other ones in which a multinational firm has affiliates (or headquarters).
In addition to the conference paper, the research was distributed as NBER Working Paper w18415, which may be a more recent version.
Investment, Accounting, and the Salience of the Corporate Income Tax
Corporate Taxes and Internal Borrowing within Multinational Firms
The Effect of Tax Rates and Tax Bases on Corporate Tax Revenues: Estimates with New Measures of the Corporate Tax Base
International Taxation and Cross-Border Banking