Tax Spillovers in Cross-Border Real Investment: Evidence from a New Dataset on Multinationals, with Michael Keen and Hayley Pallan
Abstract: This paper investigates the nature and extent of cross-border spillovers on real investment, using a newly assembled dataset on real investment in physical capital by foreign affiliates of multinationals. It articulates the channels through which such effects can arise, finding strong spillovers through statutory rates in a form that is consistent with implicit profit shifting associated with real commercial decisions. Contrary to much policy discussion, there is little evidence of cross-border effects though traditionally-defined marginal effective tax rates. Applying these results, preliminary simulations of the real investment effects of a global minimum tax are reported.
Small Firm Growth and the VAT Threshold: Evidence for the UK, with Ben Lockwood and Eddy Tam (under review)
Abstract: This paper studies the effect of the VAT threshold on firm growth in the UK, using exogenous variation over time in the threshold, combined with turnover bin fixed effects, for identification. We find robust evidence that annual growth in turnover slows by about 1 percentage point when firm turnover gets close to the threshold, with no evidence of higher growth when the threshold is passed. Growth in firm costs shows a similar pattern, indicating that the response to the threshold is likely to be a real response rather than an evasion response. Firms that habitually register even when their turnover is below the VAT threshold (voluntary registered firms) have growth that is unaffected by the threshold, whereas firms that select into the Flat-Rate Scheme have a less pronounced slowdown response than other firms. Similar patterns of turnover and cost growth around the threshold are also observed for non-incorporated businesses. Finally, simulation results clarify the relative contribution of “crossers” (firms who eventually register for VAT) and “non-crossers” (those who permanently stay below the threshold) in explaining our empirical findings.
Stimulating Investment through Incorporation, with Michael Devereux
Oxford University Centre for Business Taxation Working Paper No.16/07
Abstract: We estimate the causal effect of corporation tax on small business incorporation and investment by exploring cross-sectional variation in the impact of a 2006/07 tax reform in a difference-in-differences design. Analyzing the population of UK corporation tax records from 2001/02 to 2008/09, we present three findings. First, a one percentage point increase in the tax gains to incorporate increases the number of newly incorporated companies by around 2-4.5%. Second, there is a strong cash flow effect of taxes on corporate investment. On average, a one percentage point increase in the average tax rate reduces investment rate by about 2.2 percentage points. Third, the cash flow effect of corporation taxes on investment is most pronounced for newly incorporated firms, and diminishes over time as companies begin to establish a track record of providing credible information for bank loans. The empirical evidence suggests that incorporation lowers the cost of external finance for small businesses by reducing the information cost of borrowing. Small business incorporation leads to more investment and implies potential welfare gains for the larger society.
Does Ownership Affect the Impact of Taxes on Firm Behavior? Evidence from China, with Clemens Fuest
CESifo Working Paper No. 5316
Abstract: Does ownership affect the way firms react to corporate taxation? This paper exploits key features of recent corporate tax reforms in China to shed light on the differential impact of taxation on firms under different ownership regimes including private, collectively owned and state owned companies. Employing a difference-in-difference estimation approach, we find that the increase in the deductibility of wage costs in 2006 has led to a sizable increase of wages per worker in private firms and an even larger increase in collective-owned enterprises. In contrast, there is no significant wage response in state owned enterprises. The decrease in the statutory tax rate for domestic firms since 2008 has induced collectively owned enterprises and private firms to reduce debt while there is no significant response SOEs. Our results also suggest that the 2008 reform has reduced tax induced investment round tripping through Hong Kong, Macao and Taiwan.