Essays in international corporate taxation

Naitram, Simon Miguel (2020) Essays in international corporate taxation. PhD thesis, University of Glasgow.

Abstract

This thesis is made up of three essays on international corporate taxation. This thesis answers three important questions. First, what is the size of strategic spillovers from international tax competition? Second, what determines the magnitude and direction of corporate tax base spillovers? Third, what is the fundamental reason for taxing firms and what does this imply for the optimal design of the corporate income tax?

The theory of tax competition tells us that when governments compete for mobile capital, tax rates fall below the social optimum, leading to the under-provision of the public good. But magnitudes matter—how big a problem is the under-provision of the public good? That depends on how big strategic tax rate spillovers from corporate tax competition are. In the first essay, I estimate the size of strategic spillovers. To do so, I identify tax competition as being an optimal response to base spillovers. Using the stock of foreign direct investment between countries to approximate bilateral base spillovers, I estimate a spatial autoregressive model of tax competition. I find strategic spillovers to be a third of the magnitude of previous estimates. More specifically, I find that governments respond to a 1 percentage point reduction in the foreign average tax rate with a 0.23 percentage point cut of their own. This implies low revenue loss from tax competition and modest under-provision of the public good—much lower than is commonly implied.

Corporate tax reforms do not occur in a vacuum. In the second essay, I estimate corporate tax base spillovers on a country-by-country basis for European countries. Corporate tax base spillovers are the international externalities that occur when one government's tax rate change affects another country's tax base. We normally assume that tax base spillovers are substitutionary—that a cut in the tax rate in one country must lower corporate profits in neighbouring countries. I find that spillovers are, on average, substitutionary. However, spillovers vary across country-pairs in size and significance. Some spillovers are even complementary. I isolate theories that help us to understand this heterogeneity in spillover semi-elasticities and try to determine whether variation in the estimated semi-elasticities is explained by the structural features predicted by these theories. This essay seeks to enrich our understanding of corporate tax base spillovers.

In the third essay I derive an optimal benefit-based corporate tax rate formula as a function of the public input elasticity of profits and the (net of) tax elasticity of profits. I argue that the existence of the corporate income tax should be justified by the benefit-based view of taxation: firms should pay tax according to the benefits they receive from the use of the public input. I argue that benefit-based corporate taxation is normatively fair. Since the public input is a location-specific factor, a positive benefit-based corporate tax rate is also feasible even in a small open economy. The benefit-based view gives three clear principles of corporate tax design. First, we should tax corporate profits at source. Second, the optimal tax base is location-specific rents. Third, profit shifting is normatively wrong. An empirical application of the formula suggests the optimal benefit-based corporate tax rate on public corporations in the United States lies in the range of 35 to 59 percent.

Together, these three essays provide a clear perspective of the mechanisms of the international corporate tax system. By combining theory with evidence throughout this thesis, I show that the international corporate tax system is a complex creature. Importantly, I also provide concrete suggestions for the redesign of the corporate tax so that it fulfils a fundamental economic purpose.

• Item Type: Thesis (PhD)
• Qualification Level: Doctoral
• Keywords: Corporate taxation, public economics, benefit-based taxation, Spillovers, multinational firms.
• Subjects: H Social Sciences > H Social Sciences (General); H Social Sciences > HB Economic Theory; H Social Sciences > HJ Public Finance
• Colleges/Schools: College of Social Sciences > Adam Smith Business School > Economics
• Supervisor's Name: Azemar, Dr. Celine
• Date of Award: 2020
• Depositing User: Simon Naitram
• Unique ID: glathesis:2020-79005
• Copyright: Copyright of this thesis is held by the author.
• Date Deposited: 04 May 2020 15:39
• Last Modified: 13 Dec 2022 12:32
• Thesis DOI: 10.5525/gla.thesis.79005
• URI: https://theses.gla.ac.uk/id/eprint/79005