Abstract
In Europe, declining corporate tax rates have come along with rising tax-to-GDP ratios. This paper explores to what extent income shifting from the personal to the corporate tax base can explain these diverging developments. We exploit a panel of European data on legal form of business to analyze income shifting via incorporation. The results suggest that the effect is significant and large. It implies that the revenue effects of lower corporate tax rates—possibly induced by tax competition—will partly show up in lower personal tax revenues rather than lower corporate tax revenues. Simulations suggest that between 12% and 21% of corporate tax revenue can be attributed to income shifting. Income shifting is found to have raised the corporate tax-to-GDP ratio by some 0.25% points since the early 1990s.
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This research was carried out while Ruud de Mooij was a visiting fellow at DG ECFIN in October 2006. The views expressed in this Article are those of the authors and do not necessarily reflect the official position of the European Commission.
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de Mooij, R.A., Nicodème, G. Corporate tax policy and incorporation in the EU. Int Tax Public Finance 15, 478–498 (2008). https://doi.org/10.1007/s10797-008-9072-1
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DOI: https://doi.org/10.1007/s10797-008-9072-1