Results for “corporate tax” 243 found
Corporate taxes matter, incentives matter, but does economics matter?
This paper combines administrative tax data and a model of global investment behavior to evaluate the investment and firm valuation effects of the Tax Cuts and Jobs Act (TCJA) of 2017, the largest corporate tax reduction in the history of the United States. We extend the canonical model of Hall and Jorgenson (1967) to a multinational setting in which a firm produces in domestic and international locations. We use the model to characterize and measure four determinants of domestic investment: domestic and foreign marginal tax rates and cost-of-capital subsidies. We estimate elasticities of domestic investment with respect to each and use them to identify the structural parameters of our model, to quantify which parts of the reform mattered most to investment, and to conduct policy counterfactuals. We have five main findings. First, the TCJA caused domestic investment of firms with the mean tax change to increase by roughly 20% relative to firms experiencing no tax change. Second, the TCJA created large incentives for some U.S. multinationals to increase foreign capital, which rose substantially following the law change. Third, domestic investment also increases in response to foreign incentives, indicating complementarity between domestic and foreign capital in production. Fourth, the general equilibrium long-run effects of the TCJA on the domestic and total capital of U.S. firms are around 6% and 9%, respectively. Finally, in our model, the dynamic labor and corporate tax revenue feedback in the first 10 years is less than 2% of baseline corporate revenue, as investment growth causes both higher labor tax revenues from wage growth and offsetting corporate revenue declines from more depreciation deductions. Consequently, the fall in total corporate tax revenue from the tax cut is close to the static effect.
That is from a new NBER paper by Gabriel Chodorow-Reich, Matthew Smith, Owen Zidar, and Eric Zwick. How many times has the NYT told you otherwise? As I’ve noted in blog posts over the last six years or so, the standard literature already was indicating that such tax cuts are relatively effective (though no panaceas). I hope this settles the matter, though I fear it will not…
Via Jason Furman, who also reproduces some nice pictures from the piece.
Who gains from corporate tax cuts?
Goods producers increase their capital expenditure and employment in response to a cut in marginal corporate income tax rates or an increase in investment tax credits. In contrast, companies in the service sector mostly use any tax windfall to increase dividend payouts. We base our conclusions on a novel measure of U.S. firm-specific tax shocks that combines changes in statutory tax rates faced by each firm with narrative identified legislated U.S. federal tax changes between 1950 and 2006.
That is from a new NBER working paper by James Cloyne, Ezgi Kurt, and Paolo Surico.
From the comments, on corporate tax
Some points about corporate tax
Written from the British context:
Should the system be changed to one where companies are taxed on all the profits they make from their sales in the country?
There are a few downsides to this.
First of all it would be very hard for one country to switch to such a system without getting the rest of the world to do it too. If we did it unilaterally it would open up more differences between national tax regimes and so create, rather than reduce tax avoidance loopholes.
It is also far from clear the UK would gain from such a change. We might gain from some of the big US-based multinationals paying more tax here, but we have plenty of multinationals of our own and they would generally end up paying less here. The biggest losers could well be poorer developing countries, especially those reliant on extractive industries such as mining. If they could only tax companies based on their sales to their residents in that country that would bring in a lot less than taxing them on the share of the economic value of the products generated in that country. The UK itself still generates between 8 and 9 percent of Government revenues from corporation tax, which is pretty respectable internationally, despite being a very open economy exposed to competition.
There is also an economic question as to who ultimately bears the burden of taxes on a company – is it the shareholders, the customers, or the workers, and if the workers, is it the highly-paid top management or the people at the bottom? The answer is not certain, but it does seem likely that a shift to sales-based tax would be at the expense of the customers. In other words, by taxing internet-based suppliers more, we could be more heavily taxing ourselves.
But the strongest argument against is fairness. If a product is invented / developed / mined / refined / built and potentially even marketed and sold all round the world entirely from country X, making use of staff educated in country X, who use country X’s health care system and transport network, often with tax breaks from country X to encourage its growth, and maybe even wage subsidies from country X for its employees, who deserves to be able to tax the company’s profits? Is it country X, or every country that has someone in it who buys a product from the company? Of course if a country wants to tax sales it can, and sales taxes such as VAT are a perfectly reasonable and sensible part of a country’s tax mix; though in the EU, this is governed to a considerable extent by EU rules.
There are many further detailed points at the link. And do note this:
There is a perceived issue with the internet making it easier than ever for companies to ‘sell into’ a country with little or no presence in that country, and therefore offering little or no taxable base for the government of that country to tax the profits of. Sales taxes can be part of the answer to this.
But of course a sales tax does not appear to consumers to be a free lunch, and so it is not as politically popular as a sales-based hike in corporate rates. And so we arrive at the current mess of a situation: “We want tax equity, but you can’t possibly expect us to do that in a way that is transparent!”
The new proposal on corporate tax synchronization
The G-7 nations have coordinated (NYT, FT here) to announce a minimum corporate tax rate of 15%. Even if seen through, that doesn’t mean all rates must be at 15% or higher, rather if a rate is at 5% another country (the home base country? the countries where the customers are?) gets to tack on another 10% to make the total take 15%. That limits the incentive to post very low rates in the first place, by checking the gains from tax haven strategies.
One perennial question is whether the 15% rate is defined over gross or net income. You don’t want to tax gross income, especially if the business under consideration actually is making a loss. In any case, you basically end up taxing business income acquisition per se.
If it is net income you are taxing at minimum 15%, you haven’t done as much to limit tax arbitrage as you thought at first. Especially if the multinational and its subsidiaries engage at arm’s length transactions with shadow pricing, etc. Net income is a major object of the actual manipulations, and would become all the more so under this new plan, assuming it is applied to net income. Won’t countries wanting to play the tax haven game end up with very lax definitions of “net income”? (Or for that matter gross income?) Or does that get regulated as well?
I don’t think this whole plan should make “the Left” happy. David Fickling wrote for Bloomberg:
The more likely outcome of the current round of reform will be a continuation of the decline in corporate rates that we’ve seen for four decades. Even amid the push to prevent tax-base erosion in recent years, 24 of the 37 members of the Organization for Economic Cooperation and Development have cut their corporate tax rates since 2008, while just seven have raised them. Statutory corporate tax rates have trended downward by about 5% a decade since 1980 to the current situation, where the average sits at around 24%. Nations that want to compete with lower-taxed jurisdictions may find the pull of 15% irresistible.
And then:
The risk now is that 15% becomes not just a minimum, but an anchor for maximum tax rates as well.
In other words, the tax haven tax competition game is redone with a 15% floor, but the agreement also pinpoints a corporate tax rate that is “good enough” and would come to be seen as “best possible treatment.” Neither of those are forcing moves which would require countries to drop their rates to 15% in the resulting equilibrium, but yes I agree with Fickling that there might be a good deal of clustering right at or near 15%, accelerated by this plan of course.
Note also that, under the plan, the 100 largest corporations would have to pay tax in proportion to where they sell their goods and services, even if they are not formally located in those countries (will there be a literal notch right at “company #100”?). Ireland loses big on that provision, as in essence more corporate tax revenue would be routed to larger countries such as France and Germany. In how serious a manner would companies have to keep track of their customers? (What happened to privacy law here? Or did they never really care much about privacy to begin with!? What are crypto companies supposed to do about this?)
Biden wants to raise the U.S. corporate tax rate to 28 percent, and Ireland, one of the major supposed villains in this game, has a rate of 12.5%. So fifteen percent just isn’t that outrageously high, even if companies do end up having the pay that actual rate (though see above about gross vs. net income, and what other “outs” will there be?).
The European digital taxes may be scrapped as well (with the details under negotiation and no one wanting to “move first”), which would ease a wee bit of the burden on the major tech companies from the broader change.
Here are various observations from Soumaya Keynes.
Is the underlying view that the U.S. Congress is supposed to approve this without further renegotiations? How about the other countries?
Falling corporate tax rates appear to be the equilibrium
The average corporate tax rate globally has fallen by more than half over the past three decades, from 49 percent in 1985 to 24 percent in 2018, the study found.
“Corporate taxes are going to die in 10 to 20 years at this rate,” Ludvig Wier, an economist at the University of Copenhagen and a co-author of the study, said in an interview. “Without drastic collective action, you can see we’re nearing the end of it.”
Here is the full WaPo story by Jeff Stein.
Is eliminating corporate tax havens such a good idea?
Juan Carlos Suárez Serrato says maybe not:
We show that eliminating firms’ access to tax havens has unintended consequences for economic growth. We analyze a policy change that limited profit shifting for US multinationals, and show that the reform raised the effective cost of investing in the US. Exposed firms respond by reducing global investment and shifting investment abroad — which lowered their domestic investment by 38% — and by reducing domestic employment by 1.0 million jobs. We then show that the costs of eliminating tax havens are persistent and geographically concentrated, as more exposed local labor markets experience declines in employment and income growth for over 15 years. We discuss implications of these results for other efforts to limit profit shifting, including new taxes on intangible income in the Tax Cuts and Jobs Act of 2017.
Here is the NBER paper.
The effect of corporate taxation on investment
This study estimates the investment, financing, and payout responses to variation in a firm’s effective corporate income tax rate in the United States. I exploit quasi-experimental variation created by the Domestic Production Activities Deduction, a corporate tax expenditure created in 2005. A 1 percentage point reduction in tax rates increases investment by 4.7 percent of installed capital, increases payouts by 0.3 percent of sales, and decreases debt by 5.3 percent of total assets. These estimates suggest that lower corporate tax rates and faster accelerated depreciation each stimulate a similar increase in investment, per dollar in lost revenue.
That is by Eric Ohrn, in the American Economic Journal: Economic Policy. And from Lu Wang at Bloomberg:
After months of heated debate over whether companies would hand the biggest tax break in three decades back to shareholders or reinvest it in their businesses, there’s finally some hard data.
Among the 130 companies in the S&P 500 that have reported results in this earnings season, capital spending increased by 39 percent, the fastest rate in seven years, data compiled by UBS AG show. Meanwhile, returns to shareholders are growing at a much slower pace, with net buybacks rising 16 percent. Dividends saw an 11 percent boost.
That is hardly conclusive, but…
Why cut the corporate tax rate under full expensing?
Second, that there is some pure “profit,” some pure “rent,” some “unreproducible input” (i.e. something that did not come from a past unmeasured investment), something like the classic “unimproved land” that can be taxed, without distorting any decision. It goes hand in hand with the complaints of greater monopoly.
But I find it hard to find and name a concrete source of profits that, once named, does not distort the decision to undertake some useful activity to make those profits. Starting, organizing, and improving a business, figuring out the intangible organizational capital that makes it a successful competitor, creating a product and a brand name, are all crucial activities for which no investment tax credit will successfully offset a large profits tax. “Intangible capital” is about all most companies have these days.
That is John Cochrane replying to Stephen Williamson, there is much more at the link. I would add also that Williamson’s model seems to take “r” as constant.
The gains from cutting corporate tax rates
Here is a recent paper by Stephen Bond and Jing Xing:
We present new empirical evidence that sector-level capital–output ratios are strongly influenced by corporate tax incentives, as summarised by the tax component of a standard user cost of capital measure. We use sectoral panel data for the USA, Japan, Australia and eleven EU countries over the period 1982–2007. Our panel combines internationally consistent data on capital stocks, value-added and relative prices from the EU KLEMS database with corporate tax measures from the Oxford University Centre for Business Taxation. Our results for equipment investment are particularly robust, and strikingly consistent with the basic economic theory of corporate investment.
Via Henry Curr. Here is a piece by Fuest, Piechl, and Siegloch, forthcoming in the American Economic Review:
This paper estimates the incidence of corporate taxes on wages using a 20-year panel of German municipalities. Administrative linked employer-employee data allows estimating heterogeneous worker and firrm effects. We set up a general theoretical framework showing that corporate taxes can have a negative effect on wages in various labor market models. Using an event study design, we test the predictions of the theory. Our results indicate that workers bear about 40% of the total tax burden. Empirically, we confirm the importance of both labor market institutions and profit shifting possibilities for the incidence of corporate taxes on wages.
Via Dina D. Pomeranz. I’ve been reading in this area on and off since the 1980s, and I really don’t think these are phony results.
Corporate Taxation and Capital Taxation
In the debate over corporate taxation it’s often assumed that corporate taxes are equivalent to taxes on capital. But corporations are only a minority of firms. Most of the firms in the pass-through sector are small partnerships but by no means are all pass-through firms small. Indeed, corporate profits are less than half of all business profits as shown by the following graph from the Tax Foundation.
What this means is that a cut in the income tax is also a cut in the capital tax. Indeed, a cut in the top marginal income tax rate is a bigger cut in capital taxation than a cut in the top corporate tax rate. (Unfortunately, it now looks like the top marginal rate on income won’t be cut.)
Since pass through businesses can be large, some people have suggested that these businesses should be taxed like corporations. That would be a mistake. An ideal tax system should be neutral as to organizational form. So, if anything, corporate taxation should be moved more in the direction of pass-through taxation.
Hat tip: Lunch with Steve Pearlstein, Bryan Caplan and Tyler.
More John Cochrane on the corporate tax burden
Here is a long and very interesting post with many distinct points. Here is one of them:
So the entire corporate tax is pre-paid, or borne, by the stockholders who are unfortunate enough to be around when the corporate tax is announced. Anyone who buys shares after the corporate tax is imposed gets the shares at a lower price, so his or her return is entirely unaffected by the corporate tax.
People who buy shares after the corporate tax is imposed bear no burden of the tax. The corporate tax does not affect the rate of return received by current owners at all, because they got to buy at low prices.So much for corporate taxes soaking the rich. This is an important fact, missing in all the distributional analysis I have seen.
Here is another:
Pietro Peretto reminds me there is an active literature on optimal taxation in endogenous-growth economies, including his Corporate taxes, growth and welfare in a Schumpeterian economy , Schumpeterian Growth with Productive Public Spending and Distortionary Taxation, The Growth and Welfare Effects of Deficit-Financed Dividend Tax Cuts and Implications of Tax Policy for Innovation and Aggregate Productivity Growth. Nir Javinovich and Sergio Rebelo have a nice recent “Nonlinear effects of taxation on growth,” in the JPE, Nancy Stokey and Sergio have “Growth effects of flat-rate taxes” also in the JPE, and I have inside information that Chad Jones is working on it too. So, there is no lack of academic literature on the question just which kinds of taxes reduce growth, which of course leads to huge distortions.
Worth a full read.
That was then, this is now: corporate tax rate cut edition
Obama proposes lowering corporate tax rate to 28 percent
That is circa early 2012, and presumably Obama’s CEA signed off on the idea. Romney at the same time proposed a rate of 25 percent.
I believe that, in a rush to criticize a proposed Trump tax cut, we are in danger of forgetting the wisdom of 2012.
A simple point about corporate tax reform
For the most part, the empirical literature suggests that “cash flow” drives investment more than does say the real interest rate; you can take the latter as one proxy for non-massive changes in rates of return. So a plan to cut “back taxes” for companies still might stimulate investment, even if it doesn’t appear to alter marginal incentives in the appropriate way. It will give corporations a higher realized cash flow over the immediately prior period, and again that has had decent predictive power over investment. But causality? That is tougher to say, but of course there are theories that self-financed investments are more attractive to managers than having to bring in additional outside monitors.
There is a genuine question whether you should side with the theory or the empirics here, and I am myself agnostic. Furthermore, perhaps the cash flow of the prior periods proxies for the expected rate of return more accurately than do our available measurements for the expected rate of return. So you don’t have to take the empirical result as documenting the importance of cash flow.
Still, if you hear someone attacking a tax reform plan as a “corporate giveaway,” just ask them how well they know this literature. There is at least some chance that “giveaways” boost investment more than do targeted marginal changes.
What about Trump’s plan to cut the corporate tax rate?
That is the topic of my latest Bloomberg column, and here is one part of my argument:
This argument for a corporate tax cut — “let’s borrow more now while rates are relatively low” — is remarkably like the argument that Keynesians have been using for more government infrastructure spending for years. The main difference is that here the spending would be done by private corporations rather than the federal government. You may or may not believe the private expenditures will be more socially valuable than the government expenditures, but if you think we can afford one kind of stimulus we probably can afford the other. And as I said, the private rate of return on investment probably is higher than the government’s borrowing rate, even if you think that government spending would yield higher returns yet.
Of course that argument does not require unemployed resources. On the micro side, I find it amusing when people suggest that the rate of return on government infrastructure is high, but that corporations have nothing better to do than to sit on their cash. It is hard to have it both ways! Imagine arguing that biomedical R&D through the NIH yields high returns, but that pharma investment to commercialize the resulting drugs or devices does not. National parks aside, most government investment is in inputs, and thus for it to have a high marginal rate of return someone on the output side has to have a high marginal rate of return as well.
Here is another part of my argument:
The pessimist might wonder whether companies would take their windfall and invest it at all. Many companies might simply hold the gain in money management accounts. In this scenario, the tax plan probably won’t be worth passing, as American companies would have nothing useful to do with the free resources, even when given a nudge to invest. That should induce a fairly panicky response, including radical deregulation of business and fiscal austerity on entitlements, but I don’t see critics of the tax plan following up on this view consistently.
There is much more at the link, and do note my rather significant caveats on the plan. And here is Kevin Williamson on the plan.
That is all from Vivian Darkbloom.