Work in Progress

This paper empirically investigates whether governments are substituting from corporate to consumption taxation due to tax competition using a novel self-collected data set of corporate and consumption tax regime information. I estimate the slope of the tax policy reaction function between corporate and consumption tax rates exploiting the cross-sectional interdependence of corporate tax rates for an instrumental variable approach. Additionally, I analyze the rate-revenue relationship of both tax instruments to evaluate the overall revenue implications of corporate tax competition. I find that, on average, a one percentage point decrease in the corporate tax rate leads to a 0.35 percentage point increase in the consumption tax rate. The rate-revenue relationship of both corporate and consumption tax rates follows an inverted U-shape. Furthermore, governments can fully compensate for revenue losses from tax competition by substituting to consumption taxation. These results indicate that the debate on corporate tax competition may overstate efficiency considerations and underestimate equity concerns. 

Border adjustment taxes like the value-added tax (VAT) are commonly regarded to be non-distortionary due to their de jure trade neutrality. We analyze the effects of the VAT on trade in final goods in the European Union (EU) from 1988 to 2019. Using a gravity approach we find that the VAT is de facto non-neutral. A one percentage point VAT increase implies a 5.45\% reduction of foreign imports relative to internal trade. While institutional quality, EU accession, and preferential Common Market access cannot explain the over-proportionate reduction in imports, we provide evidence that foreign firm exit drives non-neutrality. 

This paper investigates the (heterogeneous) investment responses to corporate tax policy changes using novel country-industry-year-specific forward-looking effective tax rates (FLETRs) based on a panel of 11 industries, 70 countries, and the years 2001 to 2018. These novel FLETRs account not only for the statutory tax rate and base but also for typical country-industry-specific financing and asset structures. We show that commonly used FLETRs suffer from significant measurement error when financing and asset information is omitted, mainly due to misassigned asset weights in depreciation allowances. Exploiting substantial variation in FLETRs over time, we estimate the tax semi-elasticity of corporate investment in tangible fixed assets. Based on over 24 million firm-entity observations, our results suggest a statistically significant tax semi-elasticity of -0.41, which is at the lower end of previous findings. In a second step we identify substantial heterogeneity in investment responses for across firm subgroups. 

This paper provides event-study evidence on the dynamics of strategic tax-policy interactions. Using the participation of German municipalities in state debt reduction programs as an exogenous shock, we demonstrate how these programs affect tax rates of participating municipalities. We then show how competing municipalities -- not directly affected by the program -- adjust their tax rates in response. Combining both steps using a two-sample Wald estimator, the strategic response of competitors to a one-unit tax change by program participants ranges from 0.66 to 0.70 for the local business tax and 0.34 to 0.49 for the property tax. Characteristics of municipalities, especially proximity, influence the size and scope of tax interdependence.

This paper provides event-study evidence on the dynamics of strategic tax-policy interactions. Using the participation of German municipalities in state debt reduction programs as an exogenous shock, we demonstrate how these programs affect tax rates of participating municipalities. We then show how competing municipalities -- not directly affected by the program -- adjust their tax rates in response. Combining both steps using a two-sample Wald estimator, the strategic response of competitors to a one-unit tax change by program participants ranges from 0.66 to 0.70 for the local business tax and 0.34 to 0.49 for the property tax. Characteristics of municipalities, especially proximity, influence the size and scope of tax interdependence.