Transcript Housing taxation

Presentations
Tax policy challenges in EU Member
States
2012 Commission Tax Reform Report
and the European Semester
Gilles Mourre
DG ECFIN, European Commission
Dublin, 19 June 2013
The views expressed here are those of the author and should not under any circumstances
be regarded as stating an official position of the European Commission.
Outline
I.
Context
II.
Recent tax reforms
III. Identifying tax challenges in EU countries
• Consolidation and fiscal sustainability
• Growth-friendly tax structures
• Tax design and tax governance
• Redistributive considerations
IV. Results of the European Semester 2013
I. Context
• Tax issues are more and more prominent in the policy
debate, both w.r.t its impact on fiscal sustainability and
growth
• European Semester, the cycle of integrated economic
coordination within the EU, underlines:
 the importance of the design and structure of tax systems to make
them more effective, efficient and fairer
 acknowledge that some MS may consider increasing taxes to put their
public finance back on track
• The ECFIN/TAXUD Tax Reform Report 2012 contributes
to this discussion and served as an analytical input to the
2013 European Semester.
I. Context
• The ECFIN/TAXUD Tax Reform Report presents:
 the recent trends in tax reforms in EU Member States
 a general – indicator-based – assessment framework …
 … to identify the main tax policy challenges in EU countries.
 … with a view to improving the contribution of taxation to
macroeconomic performance
• On 29 May 2013, the Commission presented its proposal
for the European Semester 2013.
• Many country-specific recommendations (CSRs) by COM
relate to taxation: almost all MSs (bar DK, FI and programme
countries) are concerned. Programme countries follow their own
process (MoU, reviews)
• CSRs currently examined by the Council
II. Recent tax reforms
• Given public finances deterioration and turbulence in
sovereign debt markets, fiscal policies in 2011-2012 were
driven by the need to restore their long-term sustainability.
• For most MSs, the need for more revenue to support
consolidation effort was compounded by other difficulties:
 the need to support recovery
 restoring sustained growth over the medium/long term.
• Tax revenue in the EU increased in 2011 and this upward
trend is expected to continue until 2013…
• … despite adverse cyclical conditions
II. Recent tax reforms
Development of the overall tax burden
Tax-to-GDP ratio in EU-27 and euro area, 1995-2014
42.0
2013 Spring
Forecast
41.5
41.0
40.5
40.0
39.5
39.0
38.5
38.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
EA-17
Source: Commission services.
EU-27
II. Recent tax reforms
General trends over 2011-2012
• In the period 2011-2012, many MS have increased PIT,
mainly through hikes in statutory rates, or social security
contributions, while aiming at improving work incentives for
specific groups.
• Changes in the corporate tax (CIT) bases have been slightly
more frequent than increases in CIT rates.
• About half of the MS saw hikes in the VAT rates, both in the
standard rate and the reduced ones.
• Excise duties increased in most MS for environmental and
energy products and for alcohol and tobacco.
II. Recent tax reforms
Overview of tax reforms in 2011 and first half 2012
Statutory rates
Personal
Income Tax
Corporate
Income Tax
Increase
Decrease
Increase
Decrease
Social Security Increase
Contributions
Decrease
Value Added
Tax
Excise Duties
Taxation of
Property
Increase
Decrease
Increase
Decrease
Increase
Decrease
Source: Commission services.
Base or special regimes
BE, DK,CY, FI, EL, ES, IE, IT, AT, BE, CZ*, DK, ES**, FI, FR,
LU*, NL, PT
EL, HU, IE, PL, PT, SK, UK
CZ, DK, EE, FI, DE, ES, HU, IE,
FI, HU, LV, NL
LV, MT, NL, SE, UK
FR, PT
CZ, AT, BE, DK, ES**, HU
UK, FI, EL, SI, NL,
ES, HU, IT, LT, LU, UK
AT, BG, CY, FR, EL, HU, LV,
PL, PT, UK
IE, SK
DE, IE
CZ
PT, UK, CY, ES**, IE, HU, LV, AT, BE, BG, CY, DK, EL, ES**,
PL, SK, IT, FR, BG, EL, CZ
FI, LV, NL, PL, PT,
CY, EL, ES, IE, LT, PL
AT, BE, BG, CY, CZ, DE, EL,
ES, FI, FR, HU, IE, IT, LT, LU,
DK, EE, LV, PL
LV, MT, NL, PL, PT, RO, SE,
SK, SI, UK
SI
CY, EL, ES, IE, PT, UK
CY, IT, LT, LV
NL
III. Tax policy challenges in EU Countries
Focus on the wide-ranging
dimension of taxation through:
macro-economic
–
Sustainability of public finance/consolidation needs
–
Growth-friendly tax structures and tax shift
…and on a set of specific horizontal issues, related to
the design of individual types of tax:
–
Broadening tax bases in direct and indirect taxation
–
Debt bias in corporate taxation
–
Issues related to housing taxation
–
Design of environmental taxation
…and on improving tax governance
…while keeping distributional effects in mind
10
III. Main tax challenges
Horizontal screening principles
• Benchmarking of MSs using Lisbon Assessment Framework
(LAF) approach
• MS considered to face a challenge in an area if it is among
the worst performers, that is, in the bottom third of distribution
(under normality assumption); EU-27 weighted average used
as reference point for benchmarking.
• Robustness checks underway (Wöhlbier et al. 2013)
• Screening does not take country specificities into account. For
programme MSs, MoU and reviews are the sole reference.
• Need for in-depth analysis before policy conclusions are
drawn
III. Main tax challenges
Tax policy in consolidation times
• Consolidation effort requires extra tax revenue in
some MSs
 Identifying both need and …
 …. scope for further tax hikes in the short term
 Cutting expenditures in medium run to reduce gradually the
weight of taxes in some countries
 Broadening the tax bases (closing loopholes in direct and
indirect taxation) rather than increasing tax rates
III. Main tax challenges
Screening principles to identify a potential need
for tax-based consolidation
• Fiscal sustainability problems
Fiscal sustainability is considered problematic, if:
i) the indicator of fiscal sustainability gap in the medium term, "'S1" is high
OR
ii) the indicator of fiscal sustainability gap in the long term, "S2" is high
• Availability of tax space
AND: 2) There is 'overall tax space' currently available (low tax burden)
AND EITHER: 2a) There is still scope for increasing the least distortionary
taxes
OR: 2b) The tax burden has not increased substantially in the recent past.
III. Main tax challenges
Overview on fiscal consolidation on revenue
Country
BE
DE
EE
ES
FR
IT
CY
LU
MT
NL
AT
SI
SK
FI
BG
CZ
DK
LV
LT
HU
PL
RO
SE
UK
Potential need for higher
tax revenues to help
consolidation
X
X
X
X
X
X
X
Overall 'tax space'
available (low tax-toGDP ratio)
X
X
X
X
X
X
X
X
X
X
X
X
X
Source: Commission services.
No significant increase in
tax-to-GDP ratio in
recent years
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Scope for (further)
increasing least
distortionary taxes
X
X
(X)
X
X
X
(X)
X
X
X
(X)
X
(X)
X
X
X
(X)
X
(X)
III. Main tax challenges
Tax structure challenges
1995-2010
38
36
Labour taxes
34
Forecast
32
30
28
Capital taxes
26
24
22
20
Consumption taxes
18
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
ITR consumption
ITR labour
ITR capital
III. Main tax challenges
Screening principles to identify a potential
need, and room, for a tax shift
•
Need to reduce labour taxation
Labour taxation is problematically high if:
i) The 'overall tax burden on labour' is very high
OR
ii) The tax burden on specific labour markets groups, namely
low-skilled workers and/or second earners, is considered very high
•
Scope for increasing the least distortionary taxes
AND EITHER: 2(a) consumption taxes
OR: 2(b) recurrent taxes on housing
OR: 2(c) environmental taxation.
III. Main tax challenges
Screening results on tax structure challenges
High tax burden on labour
Country
BE
DE
EE
IE
EL
ES
FR
IT
CY
LU
MT
NL
AT
PT
SI
SK
FI
BG
CZ
DK
LV
LT
HU
PL
RO
SE
UK
Overall
Specific groups
X
(X)
X
(X)
X
X
X
X
(X)
(X)
(X)
Low consumption
taxes
(X)
(X)
X
X
X
X
X
(X)
X
(X)
Potential to shift
Low recurrent
taxes on housing
Low tax burden on
the environment
X
X
X
X
X
X
X
Need and room for
tax shift
X
(X)
X
X
X
X
X
(X)
X
X
X
X
(X)
X
X
X
X
X
X
X
X
(X)
X
X
X
X
(X)
X
(X)
Source: Commission services.
(X)
X
(X)
(X)
X
X
(X)
X
X
III. Main Challenges:
Tax design and tax governance
• Broadening tax bases in direct taxation by
reviewing tax expenditure
• Reducing debt bias in corporate taxation
• Increasing VAT efficiency
• Improving tax governance
• Issues of housing taxation
• Design of environmental taxation
18
III. Main tax challenges
Overview table
Broadening tax bases
Country
BE
DE
EE
IE
EL
ES
FR
IT
CY
LU
MT
NL
AT
PT
SI
SK
FI
BG
CZ
DK
LV
LT
HU
PL
RO
SE
UK
Contribution of Need and
Need to
tax increases to room for tax review tax
consolidation
shift
expenditure
in PIT
X
(X)
(X)
Tax governance challenges
Need to
Debt bias in Increasing
review tax
Tax
corporate
VAT
Tax compliance
expenditure
administration
taxation efficiency
in CIT
(X)
X
X
(X)
Special topics
Housing taxation
Structural
shift
X
Debt bias
X
Environmental taxation
GHG
target
X
Design
X
X
X
X
X
X
X
X
X
X
X
X
(X)
X
X
X
X
X
X
X
(X)
X
X
X
X
X
X
X
X
X
(X)
X
X
(X)
X
X
X
X
X
(X)
(X)
X
X
X
X
X
X
(X)
(X)
X
(X)
X
X
X
X
(X)
(X)
(X)
X
(X)
(X)
Source: Commission services.
X
(X)
X
X
X
X
X
X
X
X
X
(X)
X
X
X
(X)
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
(X)
X
(X)
X
X
(X)
X
X
X
X
X
X
X
X
X
X
X
X
Broadening tax bases
• Broad tax bases allow for lower rates and help
reduce distortionary effects of taxation
• Many Member States have cut tax expenditures in
recent years
• Member States need to regularly publish detailed
information on the impact of tax expenditures on
revenues (Council Directive 2011/85/EU of 8 Nov 2011 on
requirements for budgetary frameworks of the Member States)
• Tax expenditure data difficult to compare across
countries.
Corporate tax expenditures
Several types of tax expenditure in CIT, in particular:
•
•
•
•
•
Reduced corporate income tax rates for small businesses
Reduced corporate income tax rates for regions/sectors
Accelerated depreciation
R&D incentives
Investment incentives
Some tax expenditures might find their rationale in achieving
specific policy objectives, but questions remain on whether they
are effective and the best instrument to reach their goals
 Need for the regular reporting and review of tax expenditures
Debt bias in corporate taxation
• Tax-induced debt bias in corporate taxation; risk of high
indebtedness
Effective marginal tax rates on debt- and equity financed new
corporate investment, 2011
Source: ZEW (2012).
VAT efficiency
•
An efficient VAT should be broad-based, apply a single rate
and be collected effectively
•
Loss in VAT revenue due to policy gap + compliance gap
•
VAT 'policy' gap: Application of reduced rates and VAT
exemptions; partly due to VAT directive
•
VAT 'compliance' gap: Indicator for level of fraud;
measured by comparing actual VAT revenue with
theoretical VAT liability (calculated by taking account of the various reduced
rates, dependent on the quality of data)
•
VAT revenue ratio: Measure of sum of both gaps
VAT efficiency: The VAT revenue ratio
100
80
60
LAF plus
LAF minus
40
20
0
LU CY EE BG SI AT MT DK SE DE NL FI CZ HU RO LT SK PL IE BE FR UK PT LV IT ES EL HR*
2010
EU EA
2011
Source: European Commission.
Note: The ratio consists of the actual VAT implicit rate divided by the VAT standard rate. The implicit rate is the VAT revenues
divided by net final consumption expenditure, i.e. final consumption expenditure minus VAT receipts.
Improving tax governance
A number of Member States face the challenge of
improving tax governance:
-
a large shadow economy
high levels of potential VAT fraud and evasion
a particular potential to increase the efficiency of the tax
administration.
Better tax administration identified as a challenge in a
several MS:
-
high administrative costs per net revenue collected
non-utilisation of third party information to prefill tax returns
low extent of e-filing
the high administrative burden of tax systems for mid-sized
companies.
Tax governance
Administrative burden of tax system for a medium-sized
company
450
400
350
300
250
LAF minus
200
150
LAF plus
100
50
0
BG CZ PL HU PT IT LV SI RO SK DE EL HR LT AT ES BE CY MT FR DK NL SE UK FI EE IE LU
Source: PwC et al. (2013).
EU EA
Housing taxation (I)
• Property taxes, in particular recurrent taxes on housing, have
been found to be among the taxes least distortive and therefore
least detrimental to growth.
• Generally rather low.
4.5
4.0
Revenue from property taxes, 2011 (% of GDP)
3.5
3.0
2.5
2.0
1.5
LAF plus
1.0
LAF minus
0.5
0.0
UK DK FR BE PL EL ES IE LV SE RO PT IT FI CY NL SI DE SK HU EE LT BG CZ AT LU MT
Source: European Commission.
Recurrent property tax
Other property-related taxes
EU EA
Housing taxation (II)
• Housing taxation is often based too much on
distortive transaction taxes, thus some MS could
consider a shift within property taxation in favour
of the recurrent tax.
Tax rates on real estate transactions, 2012
Tax level
Member S tate
≥10%
BE, EL*, IT*
5-8%
FR, ES, LU, CY*, PT*, UK*
<5%
AT, DE, IE, M T, NL, SI, FI, CZ, DK, LV,
SE, HU*
None
EE, SK, BG, LT, PL
*denotes a progressive tax rate structure
Housing taxation (III)
• Nearly half of the MS face the challenge to reduce the debt
bias in housing taxation created by deductibility of
mortgage interests.
• In these countries, either imputed rents or recurrent
property taxes on owner-occupied housing are too low
compared to taxes on other capital investments:
1) rates are low
2) tax bases (cadastral values) are not updated and do not reflect current housing
market values
• Given the political difficulty to raise property taxes, a
second-best option could be to gradually phase out the
interest rate deductibility in order to remove this debt bias
and levy a lower recurrent tax on housing.
Environmental taxation
• Ensure that the policy instruments in place, including
taxes, are sufficient to meet the agreed
environmental objectives.
• Energy taxes and other environmental taxes to be
designed to provide appropriate incentives to reduce
emissions over time, e.g.:
i) adjusting the structure of tax rates on fossil fuels according to their
carbon and energy content,
ii) indexing environmental taxes,
iii) reconsidering reduced VAT rates on energy,
iv) reducing tax subsidies for company cars and
v) introducing CO2-related vehicle taxation.
Redistributive considerations
Beyond efficiency of national tax systems, the
redistributive effects of the tax system can be equally
important.
Some channels:
i)
progressive tax scale for labour income (but also income
replacing transfers, benefits and public consumption
expenditure)
ii) tax expenditures risk making the system regressive
iii) reduce incentives to work
IV. 2013 European Semester outcome
• Country-Specific Recommendations (CSRs): more
specific and concrete this year
• Principles (already applied last years) are set in
the Annual Growth Survey
• Evaluated using cross-country consistent
indicators ….
• … and country-specific evidence …
• … also running consistency checks across
countries
IV. 2013 European Semester outcome
• These principles apply to the following dimensions:







Consolidation through tax measures
Tax shifts and reducing labour taxation
Housing taxation
Tax governance
Environmental taxation
Reduction in tax expenditure, broadening of VAT base
Reducing debt bias in corporate taxation
• Deviation from the horizontal assessment framework when
proposing CSRs might be justified due to:
 special country specific circumstances,
 spill-over effects on other Member States and the European dimension
of tax policy reforms,
 very recent measures not captured by indicators but representing a
significant action to address a challenge,
 existence of bigger challenges in other sensitive policy areas
IV. 2013 European Semester outcome
• Reducing the tax burden on labour to favour job creation:
CSRs for 11 MSs
 6 CRSs on specific groups (low income earners & low skilled, second
earners).
 Risk of undeclared work
• Shifting taxation away from labour or specific labour
groups: CSRs for 9 MS
 Shift toward consumption, property or environmental taxes
 Not sufficient implementation of 2012 CSRs
IV. 2013 European Semester outcome
• Broadening tax bases: CSRs for 9 MSs
 Numerous tax expenditures in personal and corporate income
taxation
 Reducing the scope for or increasing VAT reduced rates
• Reducing debt bias in corporate taxation: CSRs for 5 MS
 Reforms under way
 Not sufficient in several MSs
• Tax governance: CSRs for 13 MSs
 Most CSRs: improving tax compliance and fighting against evasion
and fraud
 Improving the efficiency of tax administration
IV. 2013 European Semester outcome
• Environmental taxation: CSRs for 11 MSs
 6 CRSs on tax shifting
 5 CSRs on raising green taxes to meet climatic or environmental
objectives
• Housing: CSRs for 9 MS
 consolidation/increase and growth-friendly tax shift
 reform the functioning of the housing tax (through reassessing base)
 reduce the debt bias and household indebtedness
Some complementary info
• The 2012 Tax Reform Report can be downloaded here:
http://ec.europa.eu/economy_finance/publications/
european_economy/2012/pdf/ee-2012-6_en.pdf
• The release of the 2013 Tax Reform Report is foreseen
for end-September.
• ECFIN annual workshop will be held on 23 October 2013
in Brussels and will focus this year on tax expenditures
• Recent ECFIN economic paper:
Princen, Mourre,
Isbasoiu and Paternoster (2013). Discretionary tax measures:
pattern and impact on tax elasticities. EP n°499, May
http://ec.europa.eu/economy_finance/publications/
economic
paper/
THANK YOU!
38
The structure of Ireland’s tax system and
options for growth enhancing reform
Brendan O’Connor, 19 June 2013
Motivation
 Economic strategy post Troika
 Several straw-men arguments need to be analysed




Ireland’s tax burden is too low?
No further scope exists for adjustment on the revenue side?
Burden too low on high earner?
Tax burden on labour is too high?

Discussions and commentary around Budget time tend to focus on fairness,
equity and progressivity concerns

Limited focus on the potential for growth orientated reforms

Revenue neutral tax shifts – potential output gains?
What does the burden of taxation look like in Ireland
Total Taxes as % of GDP
60
36
50
29
40
30
20
10
0

Using GDP as a measure of economic output it might appear that Ireland has the
capacity for greater tax revenue by European comparisons.

But is GDP the appropriate measure of tax base?



GDP includes net factor flows out of Ireland (profits of MNCs) which are very large and
negative
2011 GDP represented 124% of GNP – second largest gap in EU (Callan et al 2013)
IFAC hybrid measure of GNP + 40% of net factor flows
What does the burden of taxation look like in Ireland
Total Taxes as % of GDP
60
50
40
36
33
36
29
30
20
10
0

Using GNP, Ireland has a greater than average share

Using the IFAC Hybrid Measure Ireland approaching EU average
Other Issues – Social Insurance Contributions



In Ireland SSC accounted for 5% of GDP in 2011 (3.5% employer, 1.3% employee)
Against and EU average of 11% and an OECD average of 9% and an EU high of
17% (France)
Should they be included in a comparison?

SSC an insurance in some countries and more akin to a tax on labour in others
Total Taxes excl SSC as % of GDP
50.0
24
40.0
30.0
20.0
10.0
0.0
25
Labour taxation comparisons also distorted by SSC
30.0
Labour Taxes as % of GDP
25.0
17
20.0
12
15.0
10.0
5.0
0.0
Share of GDP
Labour
SSC
Labour
SSC
including
excluding
Ireland
Ireland
Rank in EU27
12%
23
7%
8
EU Average
17%
6%
Distribution of tax burden
Top 1% of earners
Top 5% of earners
Top 23%
Bottom 77%
Income
Share of tax paid
> €200,000
> €100,000
> €50,000
< €50,000
20%
40%
77%
23%
Income Tax and USC, all Tax Units, Cumulative, 2012
Share of Tax Units
100%
80%
81%
77%
59%
40%
23%
0%
99%
95%
60%
20%
Share of Tax Paid
Irish income tax system is one of most progressive in OECD
300%
250%
Progressivity Measure, Single Taxpayers
Ratio of Effective Tax Rates
200%
150%
100%
50%
0%

Measurement of progressivity - ratio of effective tax rates or tax wedges of
tax payers at different income levels (167% of AW and 67% of AW) – see
OECD Taxing Wages
Low effective rates
60.0%
Average Tax Rate
Marginal Tax Rate
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
66% of AW
100% of AW
166% of AW
Income tax (incl USC) and
SSC
Ireland
11.5%
18.0%
31.5%
OECD average
21.1%
25.1%
30.5%
Top MTR not the highest in OECD but entry point one of the lowest
70%
60.0%
60%
50%
40%
30%
20%
10%
0%
16
14
12
10
8
6
4
2
0
52.0%
Top Marginal Tax Rate
Threshold for Top Marginal Tax Rate as multiple of AW
4.2
4.2
1.0
Consumption Taxation
12
16.0
10
14.0
12.0
10.0
8
8.0
6.0
6
4.0
2.0
0.0
Consumption Tax




VAT
Consumption taxes low relative to EU average – hybrid measure also below average
Share of taxation at 21% is within 1 percentage point of EU average
VAT at 6 % of GDP also second lowest in 2011 (same share in 2012)
Commission identified consumption as a tax in Ireland as having potential for a ‘tax shift’
due to its low share of GDP
Corporation Tax
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
In line with EU average as share of GDP
2.7
2.4
Above average as a share of taxation
25.0
20.0
15.0
10.0
5.0
0.0
8.3
7.5
Other
 Environmental taxes


At 2.6% of GDP equal to EU average in 2011
At 9% of total taxation, in excess of EU average of 7%, and sixth highest overall
share
 Property taxation




1.3% of GDP - in line with the EU average
Above the EU average in terms of the share of total taxation (4% v 3.5%)
Recurring tax on immovable property in line with EU average (0.9% v 0.8%)
Below other English speaking OECD countries (3%)
Benefits of higher recurrent property taxation on immovable property include their
relatively stable source of revenue, which is important in small open economies with
volatile tax bases such as Ireland (Norregard, 2013)
Summary on Structure

Capacity for additional taxation depends on ones view of appropriate measure of economic
output for the purposes of taxation taking into account the structure of the economy and
the size of the foreign owned sector

Using IFAC hybrid measure, Ireland in line with EU-27 average

Low social security contributions explains the difference in GDP terms

Consumption low relative to EU average in GDP terms

Income taxation highly progressive

Effective tax rates low up to average wage but entry to top marginal tax rate happens very
quickly
The Theory – Macroeconomic Principles
 Distortions to decisions affects components of output and growth
Y = F(L, K, A)

Total Factor Productivity the key driver of long run growth in GDP per Capita

Endogenous Growth Models





Explicitly models the process through which growth is generated
Models are results of choices of economic agents – taxation can influence these
choices
Human capital (Romer) – accumulation of human capital - taxation affects the
decision to undertake investment in education
Innovation (Aghion and Howitt 1992, 1998) – Schumpterian idea of ‘creative
destruction’, expenditure on R&D results in better quality inputs which are more
productive – effect of taxation on decision to innovate is key
Technology transfer – spillovers from human capital arising from FDI
How taxes affect the determinants of economic growth
Labour utilisation
 Employment
 Hours Worked
Taxes
 Corporation
 Labour
 Consumption
 Property
GDP per Capita
Labour productivity
 Physical capital
 Human capital
 TFP
 Research by the OECD suggests a hierarchy of harmful taxation exists
Property
Consumption
 Do not affect decision of economic
agents to supply labour, invest in
human capital, to produce, invest and
innovate





Personal Income Tax
 Affect labour utilisation and
productivity
 Typically progressive – more harmful
than consumption
 Affects TFP by distorting factor prices
 Capital income taxation affect savings
and investment decisions
Neutral to savings and investment
Same impact on after tax wages as labour
taxes – public finance economists view!
But not the view of behavioural
economists (Blumkin et al. 2012, EER)
Differential rates can improve labour
supply for goods complementary to work
An inefficient form of redistribution
Corporate Income Tax
 Affects FDI and technology spillovers
 Affects productivity by distorting factor
prices
 Affects after tax return on investment
and R&D
Growth orientated reforms

Empirical and theoretical evidence suggests that there could be gains in terms of
long run GDP per capita from increasing the use of consumption and property
taxes relative to income tax without changing overall tax revenues (OECD, 2010)

Largest gains if reduction in MTR rather than increases in thresholds (though latter
at expense of equality outcomes)
Options for Ireland
 Scope for shift to consumption (EC, 2012)
 Scope for further property (relative to English speaking OECD countries)
 Very low entry point to top MTR, (and very low effective tax rates) – shift
burden within labour
Shift within Labour
 Reforms within labour taxation (Abbas 2012)



Phase out PAYE tax credit between minimum wage and average wage – positive income
effects
Raise entry point to top MTR – positive substitution effects
Lower standard rate – positive substitution effects
 Regressive in nature – but effective rates would still remain low vis OECD
 But did not simulate the impact on GDP and employment
Simulation Results for Ireland
Labour to consumption
QUEST III – Commission’s DSGE macrosimulation model (Public Finance in EMU, 2008)
Revenue neutral shift of 1% of GDP
Years
reform
after
Year 1
Year 2
Year 3
Year 4
Year 5
GDP
0.12
0.17
0.19
0.2
0.2
Employment
0.14
0.22
0.24
0.25
0.25
HERMES – Structural model of supply side of Irish economy
Revenue neutral shift of €1bn
Years after reform
Year 1
Year 2
Year 3
Year 4
Year 5
GDP (%)
0.00
0.16
0.26
0.32
0.32
Employment (%)
0.00
0.00
0.11
-0.07
0.26
-0.08
0.41
-0.12
0.43
-0.14
Unemployment rate
Simulation Results for Ireland
Labour to Property
HERMES
Revenue neutral shift of €1 bn
Years
reform
after
GDP
Employment
Unemployment rate
Year 1
Year 2
Year 3
Year 4
Year 5
0.00
0.00
0.00
0.17
0.11
-0.09
0.30
0.26
-0.17
0.42
0.41
-0.24
0.38
0.43
-0.21
Concluding comments
 Presentation only addresses growth impacts of taxation
 Progressivity and redistribution also important


Income tax highly progressive
Tax and transfer system highly redistributive (pre and post tax/transfer gini
coefficient)
Thank you!
Incorporating implementation concerns
into tax policymaking
Jonathan Shaw (IFS and TARC)
© Institute for Fiscal Studies
Coming up
• Background
• How to incorporate implementation concerns into tax policy
evaluation
• Empirical estimates and determinants of costs
• Strategies for effective tax implementation
• Conclusion
© Institute for Fiscal Studies
Background
© Institute for Fiscal Studies
What does tax implementation include?
Anything related to how policy is going to work in practice
• Enacting laws and creating institutions
• Calculating how much taxpayers owe
• Getting tax liability into government’s pocket
Tasks involved
• Law-making
• Decision-making
• Record-keeping
• Calculation
• Information gathering
• Communication
© Institute for Fiscal Studies
Importance of tax implementation
• What we care about is ‘social welfare’ not national income:
– Distribution of income matters as well as its total level
– Income isn’t the only thing that matters
• Implementation likely to be key for increasing output and welfare
– Constrains what is feasible
– Determines resources wasted on unproductive tax minimisation
activities
– Affects success of reforms and need for remedial intervention
• But few robust causal estimates of importance of implementation
• Most would agree implementation needs to be integral to
policymaking process
© Institute for Fiscal Studies
How to incorporate implementation concerns into
tax policy evaluation
© Institute for Fiscal Studies
Costs of taxation
Lost purchasing power
authority
The revenue collected by the tax
Distortion costs
change
distort decisions over
work and what to buy
Costs that arise because taxes
relative prices and so
e.g. how much to
Administrative costs Costs incurred by tax authority in running
tax system
Compliance costs
© Institute for Fiscal Studies
Costs incurred by taxpayers in complying
with their tax obligations
Raising revenue efficiently
• Tax authority has some flexibility over instruments used
– Types of tax
– Tax rates and thresholds
– Enforcement regime
• Not all instruments impose the same costs
• Objective: raise revenue fairly and at minimum cost
• Optimal policy: equalise ‘marginal efficiency cost of funds’
(MECF) of each tax instrument
© Institute for Fiscal Studies
Implications of optimal policy
1. Evaluations of policy reforms need to include all costs of taxation
2. What matters for incremental policy changes are marginal costs
not average costs
3. Administrative costs should receive a higher weight than
compliance costs
4. Optimal setting of tax instruments are interdependent
5. Increasing enforcement until revenue equals marginal
administrative cost is unlikely to be optimal
© Institute for Fiscal Studies
Empirical estimates and determinants of costs
© Institute for Fiscal Studies
Current state of play
• Governments recognise importance of some or most costs
– Shadow price of public funds used to appraise spending projects
• But necessary empirical estimates often lacking for setting
individual tax policy parameters
– Not calculated at all, or
– Not calculated on appropriate basis for assessing reforms
© Institute for Fiscal Studies
Distortion costs: scale and determinants
UK Tax
Income tax (top 1%)
Marginal
deadweight loss
>100%
Corporation tax
£10k threshold
40%
£300k threshold
9%
VAT
-
Notes: Estimates for UK taxes
Sources: Brewer et al (2010), HMRC (2012),
Devereux et al (2012)
Key determinants
• Elasticity of taxable income
• Marginal tax rate
© Institute for Fiscal Studies
• Level of income
Evasion: scale and determinants
UK Tax
Non-compliance
(% true liability)
Income tax, NICs and CGT
5.5%
Self assessment
18.1%
SMEs
1.0%
Corporation tax
8.8%
VAT
10.1%
Notes: Average figures for UK taxes in 2010/11
Source: HMRC (2012)
Key determinants
• Probability of detection
• Size of penalty
© Institute for Fiscal Studies
• Tax morale
Compliance costs: scale
Country
Tax
Compliance costs
(% revenue)
Administrative burdens
(% revenue)
UK
PAYE/NICs
1.3%
0.4%
UK
Corporation tax
2.2%
1.9%
UK
VAT
3.7%
1.1%
Ireland
PAYE/PRSI
4.6%
0.3%
Ireland
Self employed
-
7.4%
Ireland
Corporation tax
-
1.0%
Ireland
VAT
-
2.5%
Notes: Averages for various years. Administrative burdens are based on Standard
Cost Model methodology, covering businesses and excluding costs such as tax
planning, dealing with change and understanding which obligations are relevant
Sources for compliance costs: Sandford et al (1989), Inland Revenue (1998) and
Leonard and O’Hagan (1985). author’s calculations
Sources for administrative burdens: HMRC (2012), Revenue Commissioners (2012)
© Institute for Fiscal Studies
Administrative costs: scale
Country
Tax
Administrative costs
(% revenue)
UK
Income tax
0.97%
UK
Corporation tax
0.76%
UK
VAT
0.60%
Ireland
All taxes
0.85%
Notes: Average administrative costs as percentage of net
revenue collected
Sources: HMRC (2012), Revenue Commissioners (2013)
© Institute for Fiscal Studies
Administrative and compliance costs: determinants
• Complexity of tax
– Number of rates, reliefs and boundaries
• Level of tax rates
• Characteristics of tax base
• Complexity of tax
– Size, mobility and registration
• Existence of optional schemes
• Stability
• Responsibility for assessment
• Responsibility for remittance
• Availability of help and guidance
© Institute for Fiscal Studies
Strategies for effective tax implementation
© Institute for Fiscal Studies
Implementation strategies
• Taxing market transactions
– Tend to be better documented and involve arms-length prices
• Information reporting
– Requirement to tell tax authority about transactions incurring tax
– Often means coordination is required if evasion is not to be detected
• Withholding
– Tax liability remitted by someone other than the statutory bearer
– Safeguard against no tax being remitted
• Relying on firms
– Takes advantage of existing systems and economies of scale
© Institute for Fiscal Studies
Implementation strategies (2)
• International cooperation
– Information sharing
– Coordination of tax regimes
• Exploiting IT
– Cuts cost of processing
– Reduces risk of errors
– Helps expose non-compliance
– May cut amount of information to collect
• Exploiting media channels
– Advertising
– Name and shame
© Institute for Fiscal Studies
Conclusions
• Effective implementation is crucial for a well-functioning tax
system
• Implementation concerns can be incorporated into standard tax
policy evaluation framework
• Empirical estimates of necessary parameters often lacking
• But available estimates suggests they are quantitatively
important
• Wide range of strategies for effective implementation
© Institute for Fiscal Studies
Understanding and Influencing
Taxpayer Behaviour
Keith Walsh,
Economist, Research & Analytics Branch, Revenue
19th June 2013
Research & Analytics Branch
DATA - INFORMATION - KNOWLEDGE
Outline
• Role of Revenue
• Why does understanding behaviour matter?
• Why do people pay tax?
• Irish evidence on taxpayer behaviour
• Putting theory into practice
Revenue’s Role
• Administration of the tax and customs regimes
o
o
o
o
o
o
o
o
Assessment
Collection
Debt management
Audit and other interventions
Anti-smuggling and other customs controls
Anti-avoidance
Policy advice and legislative support
EU tax policy, treaty networks and international liaisons
• Constantly reviewing these functions and the
environment in which they operate
• Strong contribution to the formulation and design
of administrable tax policy
Behavioural Economics and Taxation
• Behavioural economics
o
Brings insights from psychology into economics to better
understand how people make decisions
• Application to taxation?
o
o
Most of the tax related literature focuses on policy areas
But has great potential to improve tax administration
Behavioural Economics and Taxation
• Why does it matter?
o
o
o
Taxation in Ireland is largely based on voluntary
compliance and self-assessment
Tools like audit are effective but expensive
Targeted treatments based on behavioural insights may
be more efficient
• Prevention of errors allows tax administration to
focus on deliberate non-compliance
• Potential gains go beyond improving the
efficiency of the tax administration
o
Lowering administrative and compliance costs
Tax Compliance
• Compliance is the key objective of tax
administration
o
o
o
Filing compliance (filing returns on time)
Reporting compliance (reporting the correct income)
Payment compliance (paying amounts due on time)
• Key behavioural research question
o
Why are taxpayers compliant?
Why are Taxpayers Compliant?
1. Deterrence
2. Norms (personal and social)
3. Fairness & trust
4. Simplicity / complexity
5. Broader economic, political and social issues
•
Influence of the tax administration?
Attitudes and Behaviour in Ireland
• What do we know about the determinants of
taxpayer behaviour in Ireland?
• Revenue surveys
o
o
o
Two surveys of SMEs (2006, 2008)
Two surveys of employees (2007, 2009/10)
All published on www.revenue.ie
• Information on contacts, satisfaction and factors
that influence compliance
Survey Conclusions
• Deterrence remains important, as does fairness
• Personal norm related responses are strong from
a compliance perspective
• Many respondents have positive personal beliefs
but the level that say the same beliefs are
widespread in society is lower
• Suggestions that tax avoidance and customs /
excise issues are seen are less unacceptable than
tax evasion to some respondents
• Some categories of taxpayer have only limited
opportunities for evasion (e.g., PAYE)
Changing Culture in Tax Administration
• Seeking to influence taxpayer behaviour is not a
new concept for tax administrations
• What is new?
o
An increased focus on the links between understanding
taxpayer behaviour and developing risk treatment
strategies
• Tax administrations are putting behavioural
insights into practice
o
o
o
o
OECD Forum on Tax Administration
Sweden “Right from the Start”
Netherlands “Horizontal Monitoring”
UK Behavioural Insights Team
Direct Interventions
• Evidence-Based Experiments
o
Coleman (1996, 2007) in Minnesota

o
Wenzel (2001a, 2001b) in Australia

o
Wording of letters to companies before return deadline
Chetty and Saez (2009) in the US

o
Wording of letters to taxpayers before return deadline
Ariel (2012) in Israel

o
Wording of letters to taxpayers before return deadline
Appelgren (2008) in Sweden

o
Impacts of norms and perceptions on compliance
Hasseldine et al. (2007) in the UK

o
Wording of letters to taxpayers before return deadline
Effect of personalised information on tax credit entitlements
Behavioural Insight Team (2011, 2012) in the UK
What is Revenue Doing?
• Constantly reviewing compliance burden on business
• Burden reduction lowers costs for business
• €85m savings in administration costs
o
o
o
o
Reduced filing frequencies for VAT, Employers’ PAYE/PRSI
and Relevant Contracts Tax
An increase in the VAT registration threshold
Pre-population of IT and CT return forms
Revenue’s new electronic Relevant Contracts Tax system
What is Revenue Doing?
• Building on academic behavioural research
• Building our knowledge of taxpayer behaviour
o
o
o
Past Revenue experience
Continuing taxpayer surveys
Segmentation of taxpayer population(s)
• Experiences from other countries
What is Revenue Doing?
• Wide use of withholding arrangements and
increasing sources of third party data
• Behavioural insights have informed new
communications strategy
• Testing different approaches to how we
communicate and intervene with taxpayers
o
Evaluation using experimental or semi-experimental
methods where possible
• Two examples of randomised controlled trials
Publican Licences
• Renewal letters to all publicans issue in September
• Treatment group (400)
o
o
Randomly selected to receive a revised renewal letter
Small changes to the letter and a message included on
social norms of behaviour among publicans
• Control group (7,800)
o
Remainder of publicans received standard renewal letter
• Target: improve renewal rates and timing
25/09/12
10/09/12
26/08/12
11/08/12
Treatment
27/07/12
12/07/12
27/06/12
12/06/12
28/05/12
13/05/12
28/04/12
20%
13/04/12
29/03/12
14/03/12
28/02/12
13/02/12
29/01/12
14/01/12
30/12/11
15/12/11
30/11/11
15/11/11
31/10/11
16/10/11
01/10/11
Publican Licences
Renewal rates 1st Oct: Control 29.4%, Treatment: 35.5%
100%
80%
60%
40%
Timing of Licence Renewals
Control
0%
Publican Licences
• September / October 2011
o
Only difference between the groups is the treatment letter
• Post October 2011
o
Series of further interventions on treatment group
• Statistical testing
o
October and post-October differences are significant
• Only 6 percentage point increase?
• September 2012
o
o
Revised letter for all publican’s licence holders
Licence renewal rate on 1st October 2012 is 38%
Tax Arrears
• Cases with small arrears, recently incurred
• Random selection of 500 debt management cases
o
o
o
200 in treatment group 1 – standard letter
200 in treatment group 2 – softer letter
100 in control group – no letter (until after project)
• Target: improve management of arrears
o
Payment, part-payment, liability reduced or instalment
arrangement agreed
Tax Arrears
80%
Part-Paid
60%
Paid
Other
40%
Liability Reduced
Instalment
20%
Contact Only
0%
Standard
Soft
Control
VAT cases with arrears
Tax Arrears
80%
60%
Part-Paid
Paid
Other
40%
Liability Reduced
Instalment
20%
Contact Only
0%
Standard
Soft
Control
Income tax cases with arrears
Conclusion
• Increasing focus on behavioural insights for tax
administration
• Testing, measuring, learning from experience
• Even small changes in communications do
influence compliance behaviour
• Benefits from improvements in tax administration
go beyond just efficiency and effectiveness gains
Thank you
[email protected]
“Understanding Taxpayer Behaviour – New Opportunities for
Tax Administration”, Economic & Social Review, Vol. 43(3)
www.esr.ie
Enabling a growth-friendly tax
system: international issues
Michael Devereux
Dublin, June 19, 2013
Some basic questions
What challenges do governments face?
Why tax corporate profit at all?
How does tax affect
1.
2.
3.



4.
5.
6.
the location of economic activity?
the location of taxable profit?
growth?
How should profits be allocated ?
Where will an un-reformed system lead us?
What would fundamental reform look like?
What challenges do governments face?
In designing taxes on corporate profit

Raising revenue (especially in a time of
austerity)

Stimulating investment and growth
Competition for economic activity

Tax competition not a zero-sum game, but
total investment is limited

Are some forms of tax competition better
(fairer, more efficient) than others?


competition over profits, rather than investment?
Is any competition beneficial from a global
public policy perspective?
Why tax corporate profit at all?

Ability to pay: a proxy for personal income tax?

Payment for a benefit?

A tax on foreigners?
These do not suggest anything like conventional
corporation taxes
Taxes and 3 corporate decisions:
Where to locate real economic activity?


Depends on effective average tax rate (EATR)
How much to invest, conditional on location?


Depends on effective marginal tax rate (EMTR)
Where to locate profit?


Depends on statutory rate
Evidence: 1. Cross-border investment


Evidence that cross-border flows respond to
EATR from meta-studies by eg. Feld and
Heckemeyer (2011) based on 700 estimates
A very strong effect: a one percentage point fall
in the cross-border EATR faced by investors
leads to a 2.5% rise in inbound FDI
Evidence: 2. Investment and Growth
Strong evidence that investment responds to
EMTR
Common perception of ranking of taxes most
harmful to economic growth (OECD study, 2010):


1.
2.
3.
4.

Corporation tax
Personal income tax
Consumption taxes
Taxes on immovable property
Evidence actually not strong, but ranking also
supported by theory
Evidence: 3. Location of Profit
Many studies, subject of meta study by
Heckemeyer and Overesch (2013):



one percentage point increase in tax rate difference
leads to a 0.8 per cent fall in reported pre-tax profits
75% of effect through non-financial channels and
25% through financial channels
Taxable profit as % of GDP v
statutory corporation tax rate, 2010
Taxable profit as % of GDP
25.00
20.00
15.00
10.00
5.00
0.00
0
5
10
15
20
25
30
35
40
45
Statutory Corporation Tax Rate
118
How should profits be allocated?
From a global perspective
“It is ... important to revisit some of the
fundamentals of the existing standards. Indeed,
incremental approaches may help curb the
current trends but will not respond to several of
the challenges governments face.”
OECD, BEPS report, 2013
How should profits be allocated?
Where does a multinational company make its
profit?



many necessary places
no sufficient place
Multinationals make more profit because they
are multinational


“group synergies” in OECD terms
How should profits be allocated?

Should allocation of profit depend on how
activity is financed?

Why tax return to IP where the “corporate”
owner resides?
Ultimately, no conceptual basis for allocation of
profit
Where will a fundamentally un-reformed
system lead us in twenty years or so?
Can incremental reforms save the system?
Revenues driven down by:
Competition driving down rates
Cross-country arbitrage opportunities



maintenance of corporation tax revenues is
misleading
# tax cuts OECD
# tax cuts G20
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
Number of corporate tax rate cuts: 1983 - 2015
16
14
12
10
8
6
4
2
0
What might “fundamental” reform be?
Modifications to arm’s length principle?




To try to eliminate double non-taxation
Using formula apportionment approaches
Multilateral approaches

Formula apportionment

Destination-based tax

A simpler tax base
Formula apportionment
Requires international agreement



Water’s edge problems
Would there be an incentive for countries to join an
apportionment region?

May not reflect true location of profit?

Would still affect location decisions
Destination-based tax
Similar to VAT: zero-rate exports and tax
imports



Ideally combine with cash flow treatment (100%
allowances, no deduction for costs of finance)
BUT: a tax on profit, not value added, since
labour costs deductible
Destination-based tax
In principle, if





residence of consumers can be identified
consumers immobile
then tax would not affect business decisions
on location, investment or finance
within-group transactions would not be subject
to tax
countries would not need to compete over tax
rates
Destination-based tax

Reflects an “opportunity to tax” – based on
location of consumers

Some practical issues still to be resolved

Including whether a single country could (and
should) implement a tax on its own

Work is ongoing, drawing on experience of
VAT
A simpler tax base
Some criteria for choosing base:

Relatively easily observable
Not obviously unfair
No worse in distorting behaviour, and

Can it be implemented unilaterally?


Final thoughts for national and
international reforms
In medium term:
 may be conflict between national and
international interest, competing for scarce
resources
In longer term:
 competition likely to diminish opportunities for
taxing multinationals
 international agreement on fundamental reform
may benefit all countries
Common Consolidated Corporate
Tax Base: Closing Doors and
Opening Windows on Transfer
Pricing
Ronald B. Davies (UCD)
Transfer Pricing

Firms use prices to allocate revenues and
profits across borders
◦ Separate Accounting
◦ Generally negotiated between the firm and
the tax authority
◦ Conflict between firm’s tax avoidance and
gov’t revenue collection
CCCTB
High tax locations are concerned that
transfer pricing is hurting revenues
 CCCTB suggested as a way to reduce this

◦ Eichner and Runkel (2008, Scandinavian)

Switch from Separate Accounting to
Formula Apportionment
Formula Apportionment

Profits allocated via a formula
◦ Payroll
◦ Sales
◦ Investment
Only need to allocate income to
jurisdictions hosting a permanent
establishment
 Often said to eliminate transfer pricing

Formula Apportionment

Where
i is the weight given to factor i

Lj

Tax Base j    L
 K
  Lk
k


Kj
Sales j 
 S
Profits

k K k
k Salesk 
Intensive Margins

Keeping locations constant, as firms seek
to manipulate factors in the formula, this
creates new distortions
◦ Hines (2010, EER), Riedel (2010, ITAX), Mintz
and Smart (2004, JPubE), Nielsen, RaimondosMøller, and Schjelderup (2010, EER)
Relative Activity Shifting

Shift shares of activity to change formula
shares

Lj

Tax Base j    L
 K
  Lk
k


Kj
Sales j 
 S
Profits

k K k
k Salesk 
Shift labour, capital, and sales towards
low-tax locations
 Changes real activity

Technology Choice

Technology can affect:
◦ The ability to shift intensive activity across
locations
◦ Capital intensity
Extensive Margins
Firms can also choose to shut down
foreign affiliates in high tax locations
 No permanent establishment, no tax
liability
 Relocation vs. Outsourcing

◦ Outsourcing vs. Offshoring
Three key questions
Was transfer pricing an option?
 Do you need to carry out activity in the
high-tax jurisdiction?

◦ Location specificity: On- or off-shore

Do you need to internalize the activity?
◦ Proprietary asset: In- or out-source
◦ FDI is offshore insourcing
So which industries will make
extensive changes?
“Fuzzy” transfer prices
 Location specific; Outsourcable
 Non-location specific; Not outsourcable
 Those that were on the margin between
FDI and not to begin with

Fuzzy transfer prices

Rauch Classification
◦ Homogeneous goods traded on an organized
exchange
 Commodities; raw materials
◦ Reference priced (i.e. Benchmark prices)
 Chemicals; other specialized but relatively
homogenous inputs
◦ Differentiated goods
 Electronic components; services
Location specificity

Is the activity horizontal or vertical?
◦ Horizontal: consumer seeking
 How tradable is it?
 Retail, construction is non-tradable
 Autos, electronics, banking are tradable
◦ Vertical: input seeking
 How widely available is the input?
 Low-skill, low-cost labour easily found
 Textiles, basic assembly
 High-skill, task-specific labour hard to find
 Pharmaceuticals, software programming
Outsourcable

Nunn Classification
◦ Contract intensity of an industry
 Matches institutional quality with trade levels
◦ Contract unintensive – easily outsourced
◦ Contract intensive - internalize
Contract intensity
So which industries will have
extensive changes?

Relocation
◦ Electronics
◦ Engine manufacturing
◦ Banking

Outsource
◦ Specialized metals
◦ Chemicals

Take this with a grain of salt
Implications for Growth

Shifting real activity has relative growth
implications
◦ Can be intensive or extensive shifting
◦ Slows growth in high-tax jurisdictions relative
to low-tax countries

Changing technologies has shared growth
implications
◦ Can be switch in capital intensity or
outsourcing
Outsourcing and growth

Falk and Wolfmayr (2008) study 14 industries
across OECD countries for 90s and 00s


Service outsourcing seems to increase growth
Materials outsourcing, especially to low-wage
countries, lowers growth
Additional Price Motives

Tax management is only part of the
internal price decision
◦ Tariffs (Davies, 2012)
◦ Management Incentives
These can run counter to the tax
minimization transfer price
 CCCTB can result in greater price
manipulation

Separate Accounting

Profit
 1   u  P  fu  fu  P  f d  f d

  1  td  

 c  f d  fu    u fu    d  q 1   d    f d  f u  


1
2
 1  tu   q  f d  f u   d  f d  f u      q   d 
2
◦ Cost used by Eichner & Runkel (2011, JPubE),
Riedel & Runkel (2007, JPubE)
SA – Impact of downstream tariff
dq

d d
  P11 f d  2 P1 1   u   P*11 fu  2 P*1  1  td  f d  f u  
2
1

 1  td  
 q P f  2 P  1     P* f  2 P* 

11 d
1
u
11 u
1


 Tariff rises, output falls: q   d



But, more reason to avoid it: q 
◦ If q   d , then q falls and less
misrepresentation.
◦ If q   d , then ambiguous.
 Tariff up, more shifting; output falls, less shifting
◦ Real activity falls
SA – Impact of downstream tax
dq

dtd
 1  tu 

*
*
 q  d   P11 f d  2P1  1   u   P 11 fu  2P 1 


1
1

t


 1  td  
d

  1
*
* 
f

f
P
f

2
P
1

t
1


P
f

2
P







d
d
u
11 d
1
d
u
11 u
1



As td  , move profits upstream, q 
 Tends to reduce costs, output rises, q
moves away from  d
◦ If q   d , same direction, q rises

◦ If not, ambiguous.
SA – Impact of upstream tax
dq

dtu
  P11 f d  2 P1 1  td 1   u   P*11 f u  2 P*1   f d  f u  

1  td   1 
*
*
   P11 f d  2 P1  1   u  P 11 f u  2 1   u  P 1   q  d  


As tu  , move profits downstream, q 
 Tends to increase costs, output falls, q
moves towards  d
◦ If q   d , same direction, q falls

◦ If not, ambiguous.
FA vs. SA – Transfer price
tu = .4
20
q under FA
q under SA
q
18
16
14
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7

d
tu = .2
22
q under FA
q under SA
q
20
18
16
14
0
0.1
0.2
0.3
0.4

d
0.5
0.6
0.7
Revenue changes

CCCTB changes costs and therefore
output
◦ Total economic activity can rise or fall

A country’s tax base changes
◦ Formula
◦ Size of total activity

Lj

Tax Base j    L
 K
  Lk
k


Sales j 
 S
Profits

k K k
k Salesk 
Kj
◦ Net effect is ambiguous
Revenue Difference Revenue Difference Revenue Difference
FA vs. SA – Revenues, low markup
Downstream Tax Revenue Difference
-300
t u=.3
-400
-500
t u=.2
0
0.1
0.2
0.3
0.4
0.5
0.6
t u=.4
0.7

d
Upstream Tax Revenue Difference
1000
t u=.3
500
0
t u=.2
0
0.1
0.2
0.3
0.4
0.5
0.6
t u=.4
0.7
d
Worldwide Tax Revenue Difference
500
t u=.3
0
-500
t u=.2
0
0.1
0.2
0.3
0.4

d
0.5
0.6
t u=.4
0.7
Revenue Difference Revenue Difference Revenue Difference
FA vs. SA – Revenues, high markup
Downstream Tax Revenue Difference
200
t u=.3
0
-200
t u=.2
0
0.1
0.2
0.3
0.4
0.5
0.6
t u=.4
0.7

d
Upstream Tax Revenue Difference
200
t u=.3
0
-200
t u=.2
0
0.1
0.2
0.3
0.4
0.5
0.6
t u=.4
0.7
d
Worldwide Tax Revenue Difference
100
t u=.3
0
-100
t u=.2
0
0.1
0.2
0.3
0.4

d
0.5
0.6
t u=.4
0.7
Conclusion
CCCTB removes the incentive to use
internal prices to minimize tax avoidance
 It introduces new distortions

◦ Intensive and Extensive
◦ Location of activity
◦ Technology choices
These shift real economic activity
 No clear-cut expectation of the net
welfare, revenue, or economic
implications

Thank you