Behavioural effects of company taxation

• Applicants: Professor Dr. Andreas Oestreicher; Professor Dr. Christoph Spengel
• Subject Area: Accounting and Finance ; Economic Policy, Applied Economics
• Term: from 2014 to 2017
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 251934641

Investigations of the tax impact on business decisions improve our understanding of entrepreneurial decision-making and at the same time provide political players with valuable indications concerning potential (secondary) revenue effects of tax reforms and corresponding efficiency costs arising from the tax system. Due to the complexity resulting from the interaction of the various features of a tax system it is to be assumed, however, that even with respect to crucial areas of business decision making the intensity and structure of such impact is as yet not fully known. Studies in this field are in part contradictory in their results and only document less significant behavioral reactions of enterprises to changes in the tax framework conditions. In the literature, this outcome is traced back among other arguments to imprecise measurement of the tax burden that would affect the companies concerned. A matter of particular concern is that the tax rates on which the tax burden is measured do not take appropriate account of the impact of taxation in loss-making situations. Against this background, the goal of this research project is to quantify the extent of entrepreneurial reactions to tax reforms for crucial areas of business decision-making. This extent is to be represented in the form of elasticities determined on the basis of econometric analyses and - for purposes of orientation in political decision-making - integrated into a dynamic micro-simulation model in order to be able to translate these entrepreneurial reactions into (secondary) revenue effects. In contrast to the vast majority of existing studies the intention here is to calculate simulated marginal tax rates for a comprehensive panel of European corporations which - unlike other effective tax rates - are suited to accurately reflecting the interrelations referred to above. Subsequently, in the framework of econometric research the impact of these marginal tax rates on the capital structure, the level of investment and the extent and direction of intra-group profit shifting shall be analyzed. Based on these investigations the intention is to demonstrate to what extent simulated marginal tax rates indeed enable us to present an improved econometric explanation of tax impact on entrepreneurial decision-making in comparison to other methods used to assess effective tax rates. Besides calculating these effects on the basis of econometric analyses, we propose to gage also the extent of these behavioral reactions to tax reforms in the form of secondary revenue effects resulting from them. To this end the elasticities determined in the course of this project will be incorporated into the micro-simulation model ASSERT developed in the context of an earlier research project at the tax division of the Faculty of Economic Sciences at Göttingen University.

• DFG Programme: Research Grants