Abstract
In response to mounting international pressure to reform the ring-fenced elements of its tax system, the Swiss government has put forward a comprehensive tax reform package. The proposal comprises the introduction of a license box, a substantial reduction in cantonal profit tax rates, and an allowance for excess corporate equity. We apply a computable general equilibrium model to quantify the economic effects of this reform. Our results reveal that the license box, combined with the reduction in the cantonal profit taxes, limits the outflow of the tax base of those companies that benefit from the current preferential tax treatment. The reduction in cantonal profit taxes and the fact that regularly taxed companies additionally benefit from the license box render the reform package costly, such that tax revenues might well decline after the reform.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Since the OECD report on harmful tax practices (OECD 1998) member countries have been periodically reviewed to identify harmful tax practices. Preferential tax regimes due to different tax rates or tax base definitions for domestic and foreign-source income have been identified in several countries’ tax codes.
For instance, the Benelux countries, as well as the UK and France, have introduced license boxes, albeit using different tax base definitions and tax rates. Other countries, such as Germany and the USA, are considering the introduction of a license box.
The AECE is a variant of the Allowance for Corporate Equity (ACE) which offers a tax deductibility of the cost of equity and debt finance (Boadway and Bruce 1984; Devereux and Freeman 1991). See Auerbach et al. (2010) for a literature review. The AECE restricts the deductibility of the cost of equity finance to the amount of equity in excess of the core equity of a corporation. See Sect. 2 for a more detailed description of this reform element.
For this elasticity, the economy would start on the upward sloping part of the tax revenue hill. It ‘overshoots’ in the sense that it operates on the ‘wrong’ side of the Laffer curve after the elimination of the special tax status, but at a higher tax revenue level. The license box moves the economy even closer to the peak of the revenue hill.
Wilson (1991) and Bucovetsky and Haufler (2007) consider models of tax competition without license boxes. License boxes tend to put smaller countries at an advantage vis-à-vis larger countries. This follows from the fact that multinational companies locate internationally mobile income based on tax differentials rather than size differences. An equal-yield inflow of tax base generates a larger per capita revenue effect in smaller countries.
SPCs account for 42% of the overall corporate tax base and for 33% of corporate tax revenues.
At least in the short run, the overall budgetary effect of the reform turns out to be negative, even after increases in household capital taxes have been considered, c.f. Table 6.
The projected effective tax on patent income is below 9% which is comparable to the effective tax rate in other European patent box regimes (Evers et al. 2015) and to the tax rate under the currently existing preferential tax regime.
The reasoning applies to revenues that qualify for the license box. Overall, the tax base SPCs might locate in Switzerland will drop due to the reform whose effect on tax revenues, however, might well be fully neutralised by the higher corporate tax rate (rising from 10 to 16%) that is levied on the non-qualifying tax base of SPCs.
This implication is related to the finding that, when firms use retained earnings to finance new investments, dividend taxes are neutral for investment choices while capital gains taxes are distortionary (Auerbach 2002).
A similar finding has been reported for the 2008 German tax reform; however, there a shift to residence-based capital taxation and away from sourced-based corporate taxes entailed tax revenue losses due to the foreign ownership of assets (Stimmelmayr 2015).
Since statutory tax rates govern the transfer pricing behaviour of multinational firms, governments might find it optimal to engage in such tax-cut-cum-base-broadening policies to attract mobile income (Haufler and Schjelderup 2000). Issues of corporate agency contribute to the demand for tax-cut-cum-base-broadening policies (Koethenbuerger and Stimmelmayr 2014).
The reasoning builds on the insight that the mobility of tax bases limits the so-called capital levy problem when governments compete fiscally and helps sustain a tax system over the long haul.
The corporate tax reform has been approved by the Swiss national parliament in June 2016, but a referendum is going to be held in February 2017.
Nidwalden is so far the only Swiss canton to have introduced a license box at the cantonal level. Nidwalden’s current tax law stipulates that only 20% of the qualifying corporate income is subject to the cantonal tax rate, ensuring an effective tax burden below 10% (inclusive of the federal profit tax) for income from intangible assets.
Tax-motivated transfer pricing has received increasing research attention in recent years. A review of the empirical and theoretical literature is provided by Dharmapala (2014) and Schön and Konrad (2012), respectively. Griffith et al. (2014) evaluate the implications of the use of patent boxes in the BeNeLux countries and the UK. Their findings suggest that patent boxes attract new intellectual property but reduce tax revenues from income derived from patents.
The OECD guidelines stipulate that license boxes introduced prior to 2015 must comply with the modified nexus approach by 2021. License boxes introduced after 2015 need to comply with the approach right away.
The initial report of the steering committee (FDF 2013) considered two different types of license boxes: a narrow and a broad one. The former (latter) covers about one-third (two-thirds) of an SPC’s profit. The tax reform as approved by the Swiss national parliament applies the narrow-type license box.
The Swiss ministry of finance conducted a survey to arrive at the estimated share of one-third of qualifying profits of SPCs (FDF 2013). As this measure might be (downward) biased for several reasons, we conduct a sensitivity analysis (see Table 8) assuming that a larger fraction of profits of SPCs and regularly taxed companies qualify for the license box.
The effective tax burden of 16.84% \((=0.0978+0.0783\times (1-0.0978))\) for SPCs under the license box regime is composed of an average cantonal profit tax rate of 9.78% \((=1/3\times 0.1\times 0.1397+2/3\times 0.1397)\), the federal profit tax of effectively 7.83% and accounts for the deductibility of the cantonal tax from the federal tax base. The qualifying portion of income is subject to an effective tax burden of 1.4% \((=0.1\times 0.1397)\) at the cantonal level or 9.12 per cent \((=0.1\times 0.1397+0.0783\times [1-(0.1\times 0.1397)])\) when accounting for the federal tax burden in addition.
The effective tax burden of 20.13% \((=0.1343+0.0783\times (1-0.1343))\) of regularly taxed companies is composed of an average cantonal profit tax rate of 13.43% \((=0.05\times 0.1\times 0.1397+0.95\times 0.1397)\), the federal profit tax of effectively 7.83%, and accounts for the deductibility of the cantonal tax from the federal tax base.
The effective tax burden for SPCs of 13.55% \((= 0.0620 + 0.0783\times (1-0.062))\), after the introduction of the license box and the reduction in the cantonal tax rate, is based on an effective cantonal tax rate of 6.20 per cent \((=1/3\times 0.1\times 0.0886 + 2/3\times 0.0886)\).
The effective tax burden for regularly taxed companies of 15.63% \((= 0.0846 + 0.0783\times (1-0.0846))\), after the introduction of the license box and the reduction in the cantonal tax rate, is computed using an effective cantonal tax rate of 8.46% \((=0.05\times 0.1\times 0.0886 + 0.95\times 0.0886)\).
The stated tax burden at the cantonal level accounts for the deductibility of federal and cantonal taxes, whereas the stated tax burden at the federal level accounts only for the deductibility of the federal tax. The additional deductibility of the cantonal tax from the federal tax base is accounted for in the effective tax burden measure.
Different types of equity capital that are not eligible for the tax deduction include, among others, equity stakes in other companies because the income received from these stakes is also not taxed at the level of the holding company. Further, equity in the form of foreign-held property or equity that is dispensable for the business activity is also not eligible for tax deductibility.
The computation of the tax relief associated with the AECE is based on the estimated revenue loss of 610 m Swiss francs (FDF and FTA 2014). Further, the AECE is only designed to secure the current tax base of the Swiss finance branch and, hence, the tax benefit for RTCs emerging under the AECE is determined residually.
The tax relief associated with the AECE is proportional to the tax rate. Therefore, the tax benefit of the AECE increases for SPCs because these firms face an increase in their tax burden after the introduction of the license box and the reduction in cantonal tax rates. For RTCs, the reverse is true.
The calculation is based on income facing a top tax rate of 36.6% (11.0 and 25.6% at the federal and the cantonal level, respectively), yielding an effective tax burden of 19.4% \((=0.6\times 11.0+0.5\times 25.6)\) under the current imputation system and an effective tax burden of 21.96% \((=0.6\times (25.6+11.0))\) after the reform.
The discussion of the effects of dividend taxes centres around the New and Old View of dividend taxation. The two views differ in the way marginal investments are financed. Under the Old View, assuming new share issues are the marginal source of investment funds, dividend taxes increase the cost of capital and distort corporate investment, while capital gains taxes are neutral. Differently, if retained earnings are the marginal source of funds (New View), dividend taxes are neutral for investment behaviour, while capital gains taxes are distortive (Auerbach 2002).
Interestingly, this reform element counteracts one of the major aims of the previous (second) Swiss corporate tax reform (CTR II) to lower the dividend tax-induced distortions. For an analysis of the second Swiss corporate tax reform (CTR II), see Dietz and Keuschnigg (2003).
Even though corporate capital gains are largely tax exempt under the current system, Keuschnigg (2006) suggests that about 20% of corporate capital gains are nevertheless subject to taxation due to the various exemptions from the non-taxability of capital gains. Further, capital gains are taxed upon realisation and not on an accrual basis, which results in a significant tax benefit during the holding period of capital gains. In the case of an average holding period of 10 years for corporate equity, the effective tax burden on corporate capital gains is reduced to about 0.67% of the statutory tax rate (see Keuschnigg 2006; OECD 1991), giving rise to an effective tax burden of 4.9% \((=0.2\times 0.67\times 36.6)\) on corporate capital gains at the personal level under the current system and 17.2% \((=0.7\times 0.67\times 36.6)\) under the proposed system. However, while unincorporated capital gains are generally subject to taxation, they, similar to dividend income, benefit from an imputation rate of 40% at the federal level and around 50% at the cantonal level. Assuming a top marginal income tax rate of 11.0 and 25.6% at the federal and cantonal levels and accounting for the tax benefit of around 0.5 arising from an assumed holding period of 20 years for unincorporated equity, the effective tax burden on unincorporated capital gains amounts to roughly 9.7% \((=0.5\times (0.6\times 11.0+0.5\times 25.6))\) under the current system and 12.8 per cent \((=0.5\times 0.7\times 36.6)\) under the proposed system.
See Chatagny et al. (2015) for a more detailed analysis of this reform element.
The fixed factor determines the importance of the sector-specific economic rent that can be realised in that sector.
New share issues are considered an additional source of funds in the model. Their fraction, however, is constant throughout the simulations.
The convex agency cost function implies that banks charge an additional fee of m(b), which is dependent on the firm’s debt-to-asset ratio, to insure against the higher default risk of more indebted firms.
Plainly, in a corporate tax system where the deductibility provision only applies to excess equity and CE denotes the amount of core equity, the tax subsidy is \(zi^E(K-B-CE)\), provided that \(K-B-CE>0\).
Solving (3) forward yields an explicit expression for the firm value that is determined by the discounted sum of all future tax adjusted distributions to firm owners,
$$\begin{aligned} V_{t} = \sum \limits ^{\infty }_{k=t} \frac{\frac{1-\tau ^{D}}{1-\tau ^{G}} \left( \pi _k + BN_k - I_k \right) }{1+\frac{r_{k}}{1-\tau ^{G}}} \prod \limits ^{k+1}_{u=t} \frac{1+g}{1+\frac{r_{u}}{1-\tau ^{G,f}}}. \end{aligned}$$The shadow price of capital is positive, indicating that any additional unit of capital increases the value of the firm. Conversely, the shadow price of debt is defined as a negative variable, since each unit of debt incurred has to be repaid, inclusive of interest, in the future.
Otherwise, retaining profits for investment increases core equity capital and the deductibility rate, z, will not influence investment and \(\partial (F_K-\delta )/\partial z=0\).
Given the reported elasticity for Austria, foreign profits subject to Austrian taxes decrease by 10.7% if the corporate tax rate in Austria is increased by 10% points. Similarly, foreign profits subject to taxation in Belgium and the Netherlands decline by 27.5 and 29.2%, respectively, if the corporate tax rates are increased by 10% points in these countries.
Relatedly, there is a recent literature that looks into the importance of non-tax reasons for income shifting. For instance, accounting for non-tax-related internal debt financing, the results in Egger et al. (2014) points at much higher tax-sensitivity of internal debt shifting compared to previous findings.
Evidently, before the tax increase the economy might have operated on the upward sloping part of the revenue hill, but at a higher value of tax revenues.
The license box is estimated to capture roughly one-third of SPC profits and 5% of profits of RTCs. The numbers are provided by the Swiss ministry of finance. As politicians might have had an incentive to understate the tax benefits of the license box and understate the cost of reform to move it through parliament more easily, we also conduct a sensitivity analysis assuming that 50% of SPC profits and 7.5% of profits of RTCs are eligible for the preferential tax treatment of the license box. The simulation results are presented in Table 8.
As explained above, about 5 per cent of the profits of RTCs are assumed to be eligible for the license box (FDF and FTA 2014).
Interestingly, for larger elasticities of profit shifting, the economy generally operates on the wrong side of the tax revenue hill for SPCs after the elimination of the special tax regime; however, such a conclusion cannot be drawn for the lower elasticity values (c.f. Table 2). For instance, for \(\epsilon _{S} = 0.7\), the elimination of the special tax status (which results in a rise in tax rate for SPCs) increases tax revenues collected from SPCs. Surprisingly, the reduction in the effective tax rate following the introduction of the license box further increases SPC tax revenues. Thus, it appears that the economy starts on the upward sloping part of the tax revenue hill, but ‘overshoots’ in the sense that it operates on the wrong side of the Laffer curve after the elimination of the special tax status. The license box moves the economy closer to the peak of the revenue hill.
Since 90% of income that qualifies for the license box is tax exempt at the cantonal level, the effective tax rate on license income levied after the elimination of the special tax regime and the introduction of the license box is \((0.1 \times 13.97 + 7.83 = )\) 9.23% (c.f. Table 1).
For instance, the canton Vaud already reduced the aggregate ordinary corporate tax rate (federal and cantonal) to 13.8% from the year 2019 onwards, compared to the current 21.65%. Similarly, the cantons of Fribourg and Geneva announced plans to reduce their corporate tax rates by roughly 6 and 11% points, respectively, which corresponds to a new aggregate ordinary corporate tax rate (federal plus cantonal) of approximately 13.5%.
The reduction in the current cantonal profit tax of 13.97% by 4.1% points \((0.0987 = 0.1397-0.041)\) implies a total effective tax burden of 16.93% \((=0.0987 + 0.0783\times (1-0.0987))\). Additionally accounting for the tax benefit arising from the introduction of the license box reduces the effective tax burden of former SPCs to 14.20% \((=1/3\times (0.1\times 0.0987)+2/3\times 0.0987+ 0.0783\times (1-(1/3\times 0.1\times 0.0987+2/3\times 0.0987))\) and to 16.52% for RTCs \((= 0.05\times 0.1\times 0.0987 + 0.95\times 0.0987 + 0.0783\times (1-(0.05\times 0.1\times 0.0987+0.95\times 0.0987))\).
When the profit stream is domestically owned, a lower tax rate continues to increase efficiency and welfare.
See Auerbach (2002) for a review of the two competing views.
The computation of the effective tax burden on capital gains accounts for the tax benefit accruing during the holding period of capital gains, i.e., we assume that the effective tax burden on capital gains amount to about 60 per cent of the statutory tax rate, in addition to all other legal definitions of the capital gains tax base. Given that the changes in the imputation system affect unincorporated capital gains as well, the tax burden for this type of capital gains increases from 9.7 per cent to 12.8%.
References
Alstadsæter, A., Jacob, M., & Michaely, R. (2015). Do dividend taxes affect corporate investment?. Journal of Public Economics (forthcoming).
Auerbach, A. J. (1979). Wealth maximization and the cost of capital. Quarterly Journal of Economics, 93(3), 433–446.
Auerbach, A. J. (2002). Taxation and corporate financial policy. In A. J. Auerbach & M. Feldstein (Eds.), Handbook of Public Economics (Vol. 3). Amsterdam: North-Holland.
Auerbach, A. J., Devereux, M. P., & Simpson, H. (2010). Taxing corporate income. In J. A. Mirrlees, S. Adam, T. Besley, R. Blundell, S. Bond, R. Chote, M. Gammie, P. Johnson, G. D. Myles, & J. Poterba (Eds.), Dimensions of tax desing: The Mirrlees review (chap. 9). Oxford University Press.
Boadway, R., & Bruce, N. (1984). A general proposition on the design of a neutral business tax. Journal of Public Economics, 24, 231–239.
Bradford, D. F. (1981). The incidence and allocation effects of a tax on corporate distributions. Journal of Public Economics, 15, 1–22.
Bucovetsky, S., & Haufler, A. (2007). Preferential tax regimes with asymmetric countries. National Tax Journal, 60, 789–795.
Bucovetsky, S., & Wilson, J. (1991). Tax competition with two tax instruments. Regional Science and Urban Economics, 21, 333–350.
Chatagny, F., Koethenbuerger, M., & Stimmelmayr, M. (2015). Introducing an IP license box in Switzerland: Quantifying the effects. CESifo working paper series, working paper no. 5450, July, Munich (Germany).
Chirinko, R. S. (2002). Corporate taxation, capital formation, and the substitution elasticity between labor and capital. National Tax Journal, 55, 339–355.
Cummins, J. G., Hassett, K. A., & Hubbard, R. G. (1996). Tax reforms and investment: A cross-country comparison. Journal of Public Economics, 62, 237–273.
Devereux, M. P., & Freeman, H. (1991). A general neutral profits tax. Fiscal Studies, 12, 1–15.
Devereux, M., & de Mooij, R. (2011). An applied analysis of ACE and CBIT reforms in the EU. International Tax and Public Finance, 18, 93–120.
Dharmapala, D. (2014). What do we know about base erosion and profit shifting? A review of the empirical literature. Fiscal Studies, 35, 421–448.
Dietz, M., & Keuschnigg, C. (2003). Unternehmenssteuerreform II. Quantitative Auswirkungen auf Wachstum und Verteilung, Schriftenreihe Finanzwirtschaft und Finanzrecht, 96, Verlag Haupt, Bern.
Egger, P., Keuschnigg, C., Merlo, V., & Wamser, G. (2014). Corporate taxes and internal borrowing within multinational firms. American Economic Journal: Economic Policy, 6, 54–93.
Evers, L., Miller, H., & Spengel, C. (2015). Intellectual property box regimes: Effective tax rates and tax policy considerations. International Tax and Public Finance, 22, 502–530.
FDF, Swiss Federal Department of Finance. (2013). Massnahmen zur Stärkung der steuerlichen Wettbewerbsfähigkeit (Unternehmensteuerreform III).
FDF and FTA, Swiss Federal Department of Finance and Swiss Federal Tax Administration (2014). Erläuternder Bericht zur Vernehmlassungsvorlage über das Bundesgestz über steuerliche Massnahmen zur Stärkung der Wettbewerbsfähigkeit des Unternehmenstandorts Schweiz (Unternehmenssteuerreformgesetz III), Bern.
FTA, Swiss Federal Tax Administration. (2015). Botschaft des Bundesrates vom 05.06.2015 zum Unternehmenssteuerreformgesetz III, BBL 2015, p. 5069.
Griffith, R., Miller, H., & O’Connell, M. (2014). Ownership of intellectual property and corporate taxation. Journal of Public Economics, 112, 12–23.
Gordon, R. H. (2010). Taxation and corporate use of debt: Implications for tax policy. National Tax Journal, 63, 151–174.
Haufler, A., & Schjelderup, G. (2000). Corporate tax systems and cross country profit shifting. Oxford Economic Papers, 52, 306–325.
Havranek, T., Horvath, R., Irsovab, Z., & Rusnaka, M. (2015). Cross-country heterogeneity in intertemporal substitution. Journal of International Economics, 96, 100–118.
Hines, J., & Rice, E. M. (1994). Fiscal paradise: Foreign tax havens and American business. Quarterly Journal of Economics, 109, 149–182.
Hong, Q., & Smart, M. (2010). In praise of tax havens: International tax planning and foreign direct investment. European Economic Review, 54, 82–95.
Huizinga, H., & Laeven, L. (2008). International profit shifting within multinationals: A multi-country perspective. Journal of Public Economics, 92, 1164–1182.
Huizinga, H., & Nielsen, S. B. (1997). Capital income and profit taxation with foreign ownership of firms. Journal of International Economics, 42, 149–165.
Institute for Fiscal Studies. (1991). Equity for Companies—A corporation tax for the 1990s, London.
Karkinsky, T., & Riedel, N. (2012). Corporate taxation and the choice of patent location within multinational firms. Journal of International Economics, 88, 176–185.
Keen, M. J. (2001). Preferential regimes can make tax competition less harmful. National Tax Journal, 54, 757–762.
Keen, M. J., & King, J. (2002). The Croatian profit tax: An ACE in practice. Fiscal Studies, 23, 401–418.
Keen, M. J., & Konrad, K. (2014). The theory of international tax competition and coordination. In A. J. Auerbach, R. Chetty, M. Feldstein, & E. Saez (Eds.), Handbook of public economics (Vol. 5, pp. 257–328). Amsterdam: North Holland.
Kehoe, P. J. (1989). Policy cooperation among benevolent governments may be undesirable. Review of Economic Studies, 56, 289–296.
Keuschnigg, C. (2006). Ein Zukunfts- und Wachstumsorientiertes Steuersystem für die Schweiz, Universität St. Gallen.
King, M. (1974). Dividend behaviour and the theory of the firm. Economica, 41, 25–34.
Koethenbuerger, M., & Stimmelmayr, M. (2014). Managerial incentives and corporate deductibility provisions. Journal of Public Economics, 111, 120–130.
Koethenbuerger, M., Liberini, F., & Stimmelmayr, M. (2016). Is it luring innovations or just profit? The case of European patent boxes. mimeo, ETH Zurich.
Mintz, J., & Smart, M. (2003). Income shifting, investment, and tax competition: Theory and evidence from provincial taxation in Canada. Journal of Public Economics, 88, 1149–1168.
Mohler, L., & Müller D. (2012). Substitution elasticities in Swiss manufacturing. Report for the Swiss Federal Office of Energy (SFOE).
Mueller, T. (2004). Evaluating the economic effects of income security reforms in Switzerland: An integrated microsimulation—Computable general equilibrium approach. Geneva: University of Geneva.
OECD. (1991). Taxing profits in a global economy: Domestic and international issues. Paris: OECD Publishing.
OECD. (1998). Harmful tax competition, an emerging global issue. Paris: OECD Publishing.
OECD. (2013). Action plan on base erosion and profit shifting. OECD Publishing. doi:10.1787/9789264202719-en.
OECD. (2015). Countering harmful tax practices more effectively, taking into account transparency and substance, action 5—2015 final report, OECD/G20 Base Erosion and Profit Shifting Project. OECD Publishing, Paris.
Pictet. (2014). Performance of shares and bonds in Switzerland (1926-2014), Banque Pictet & Cie SA, Zurich.
Poterba, J. M., & Summers, L. H. (1985). The economic effects of dividend taxation. In E. Altman & M. Subrahmanyam (Eds.), Recent advances in corporate finance (pp. 227–284). IL: Homewood.
Radulescu, D., & Stimmelmayr, M. (2010). The impact of the 2008 German corporate tax reform: A dynamic CGE analysis. Economic Modelling, 27, 454–467.
Schön, W., & Konrad, K. (Eds.) (2012). Fundamentals of international transfer pricing in law and economics, MPI studies in tax law and public finance. Berlin: Springer.
Schweizerische Parlament. (2016). Unternehmenssteuerreformgesetz III. Ständerat, Sommersession 2016, Zwölfte Sitzung, 17.06.16, 08h15, 15.049.
Stimmelmayr, M. (2007). Fundamental capital income tax reforms: Discussion and simulation using ifoMOD, Mohr Siebeck, Tübingen.
Stimmelmayr, M. (2015). Investors’ portfolio choice and tax reforms: The 2008 German corporate tax reform reconsidered. CESifo working paper series, Working paper no. 5311, Munich.
Wilson, J. (1991). Tax competition with interregional differences in factor endowments. Regional Science and Urban Economics, 21, 423–452.
Yagan, D. (2015). Capital tax reform and the real economy: The effects of the 2003 dividend tax cut. American Economic Review, 105, 3531–3563.
Zodrow, G. R., & Mieszkowski, P. (1986). Pigou, Tiebout, property taxation, and the underprovision of local public goods. Journal of Urban Economics, 19, 356–370.
Acknowledgements
We are grateful to seminar and conference participants in Munich (CESifo Conference on Public Sector Economics, 16–18 April 2015), Zurich (KOF Seminar, 27 May 2015), Basel (Annual Meeting of the Swiss Society of Economics and Statistics, 2–3 June 2015) and Boston (International Conference on Economic Modeling, 15–17 July 2015). In particular, we are grateful for the valuable comments by Dirk Schindler, Andreas Haufler, the editor and two anonymous referees.
Author information
Authors and Affiliations
Corresponding author
Appendix
Appendix
1.1 Behavioural parameters
The CGE model is a comprehensive, nonlinear equation system that represents the supply and demand sides of the factor and goods markets. All model parameters and behavioural elasticities are selected in line with the relevant empirical findings to ensure that the model maps the underlying economy as closely as possible. Table 10 lists the choice of behavioural elasticities and parameters.
One parameter of particular importance for the quantification of the effects of the CTR III is the elasticity of profit shifting. This elasticity measures the sensitivity of the tax base of SPCs to a change in the tax differential between Switzerland and the rest of the world (in relative terms). Since no specific empirical estimate of this parameter is available for Switzerland, we performed our simulations using different plausible values for this elasticity, ranging from 0.4 to 1.5. The lower bound value of 0.4 is consistent with the elasticity estimated for Austria by Huizinga and Laeven (2008). The upper bound of 1.1 (and 1.5) is similar to (slightly higher than) the value found by Huizinga and Laeven for Belgium (1.13) and the Netherlands (1.05). Similar to Switzerland, these countries are small open economies.
Another important parameter is the elasticity of intertemporal substitution. This parameter steers the intertemporal consumption pattern of households. The empirical literature provides many different estimates for this behavioural elasticity. The applied value of 0.48 is only slightly lower than the mean estimate of 0.5 reported by Havranek et al. (2015).
The elasticity of factor substitution is taken from Mohler and Müller (2012), who provide a series of estimates for different versions of nested CES production functions for Switzerland. With regard to the elasticity of substitution between capital and labour, the authors report varying values slightly below 0.6 for the different sectors of Swiss manufacturing. The variation in the long-run capital stock due to an increase in the user cost of capital is determined by the elasticity of capital demand. We apply an estimate of -1 for the semi-elasticity (see Chirinko 2002), indicating that a 1 percentage point increase in the user cost of capital causes a decline in the capital stock by 1%. The elasticity of the debt-to-asset ratio with respect to the profit tax rate measures the increase in a firm’s debt-to-asset ratio due to a change in the profit tax and thus the change in the tax benefit associated with debt finance. In line with Gordon (2010), we set the value for this elasticity to 0.43. Hence, in response to a 5% point increase in the profit tax rate, the firm raises its debt level by 2.2 \((=0.43\times 5)\)% points. The speed of convergence towards the new steady state depends crucially on the half-life of investments. In accordance with the existing literature (see Cummins et al. 1996, for instance), we assume a value of 8.0 for this parameter. Thus, half of the reform-induced long-run variation in the capital stock will have taken place after 8 years. Finally, another elasticity that influences general equilibrium effects is the labour supply elasticity. In our model specifications, we distinguish between three skill-categories of workers. The estimates by Mueller (2004) suggest an elasticity of the labour supply of 0.1, 0.2 and 0.5 for low-, medium- and high-skilled employees. Weighted by the size of the different skill groups, the figures translate into a rather low value for the average labour supply elasticity of about 0.2. Aside from the behavioural elasticities, several other economic parameters have to be set ex ante. The most important economic variable is the long-run growth trend of the economy (set to 0.02), proxied by a measure of output capacity computed by the macroeconomic model of the Swiss Economic Institute, KOF. Finally, we use the performance indices computed by Pictet (2014) to compute the rate of return on firms’ bonds (0.033) and equity (0.079).
1.2 Macroeconomic equilibrium of the Swiss economy
The model is calibrated to replicate the steady-state equilibrium of the Swiss economy in 2010. The pre-reform tax system serves as the initial steady-state equilibrium. Table 11 reports the relevant macroeconomic indicators of the Swiss economy, the estimations produced through our model (column CH-Mod), as well as the 2010 point value and 6-year moving average value of these indicators. The table shows a high level of goodness-of-fit between the initial equilibrium as replicated by the model and the observed economic indicators in 2010. The replicated equilibrium also fits quite well with the moving average values for 2010, which includes the years of the recent global financial crisis.
Rights and permissions
About this article
Cite this article
Chatagny, F., Koethenbuerger, M. & Stimmelmayr, M. Introducing an IP license box in Switzerland: quantifying the effects. Int Tax Public Finance 24, 927–961 (2017). https://doi.org/10.1007/s10797-017-9441-8
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10797-017-9441-8