Profit taxes are widely acknowledged to influence the location of firms’ headquarters. This paper sheds light on the role of aspects of labor taxation for the international location of headquarters. While profit taxes can be avoided in various ways, it is much harder for firms to manipulate the firm-specific labor tax base so that labor taxes may be relatively important for firm location. We construct a unique data set of effective labor taxes in 120 countries and use data on the location of 35,306 firms to analyze the impact of labor income tax rates, the progressivity of the income tax schedule, and social security contributions on firms’ decisions where to locate their headquarters. The findings suggest that both a higher progressivity of the tax system and higher (employee- and employer- borne) social security contributions negatively influence a country’s attractiveness for headquarters location. Hence, a one percentage point increase in these payroll taxes reduces the probability of a country to attract headquarters by 6.1 percent. The results prove robust in various empirical model specifications and subsets of data.
We estimate the long-run elasticity of the capital stock with respect to the user cost of capital using two firm-level datasets from Amadeus, which cover 31,740 domestic independent firms and 10,666 subsidiaries of multinational companies in the manufacturing sector from 7 European countries over the period 1999-2007. Consistent with the results based on the industry-level data in Bond and Xing (2010), we find that capital intensity at the firm level is strongly responsive to changes in the tax-adjusted user cost of capital. Our benchmark estimation results remain robust when we deal with short panel issues and the endogeneity of explanatory variables using the Generalised Methods of Moments estimator suggested by Arellano and Bond (1991). Our preliminary investigation suggests that firms with different tax status may respond differently to corporate tax incentives. Furthermore, using a sample of subsidiaries of multinational companies, we do not find multinational companies capital intensity, conditional on their location choice of investment, responds to changes in corporate tax incentives in a different way.
In the last 30 years, the empirical literature on the effects of taxation on business behaviour has addressed key questions for growth and for revenue collection: firms’ investment, financing decisions, and avoidance behaviour have been investigated in their relationship to taxation. In general, despite variation in the magnitude of estimated effects, the literature agrees on the direction of the effects.
Three elements are missing from this vast literature, though. First, we know very little about the heterogeneity of firms’ responses to various features of the corporate tax system. Most of the results derived in the literature focus on larger businesses, generally in the US but most European economies are characterised by a considerable proportion of smaller firms. The focus of the literature on larger companies has been determined by data availability. Second, to summarize the effects of the corporate tax system, the literature has generally employed two types of tax rates: either country-level or firm-level average tax rates. Country-level rates cannot account for the heterogeneity of tax positions across firms. Firm-level rates are mostly calculated as the ratio between the accounting tax expense and the accounting pre-tax profit, whereby the variables are derived from publicly available accounts. They are generally endogenous and they may not reflect the real tax burden of the firm, as accounting and tax data may differ substantially. The literature is therefore likely to estimate the real effective tax rate with measurement error. The third element missing from the literature is research on the financial sector. The financial sector has largely been excluded from the empirical research on the effects of taxes on business behaviour.
This paper surveys the literature on firm’s capital structure as an example of how administrative and tax return data could potentially address the shortcomings of the literature.
The current international tax system based upon the principles of source and residence is no longer suited to a globalised world economy, and the fundamentals of the international tax system need to be re-examined. An R+F cash-flow based on the principle of destination has been proposed as a suitable alternative to taxing corporations in an international setting. The aim of this paper is to discuss the legal and practical issues which would arise in the implementation of such a tax, namely how a destination-based tax could be effectively designed and implemented. For this purpose we draw on experiences with designing VAT systems worldwide. It is proposed that the destination principle should be implemented through use of the customers’ location as the main legal proxy. We argue that the country where the customer is located has both the substantive jurisdiction to tax, i.e. the legitimacy to impose tax, and enforcement jurisdiction to tax, i.e. the effective legal and implementing means of collecting the proposed tax. As regards enforcement jurisdiction to tax, we propose that a one-stop-shop system similar to that being experimented in VAT as the most effective means of collecting tax. Other potential implementing issues are addressed, namely deductibility of expenses and tax credits, susceptibility to avoidance and fraud, treatment of financial transactions, and treatment of small businesses. We conclude that, if it were applied in an international cooperation setting, it would indeed be legitimate and administratively possible to implement a destination-based corporation tax.