公司所得税与经济扭曲

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PRINTED ON WHITE CHLORINE-FREE PAPER 1 Corporate Income Tax and Economic Distortions by Gaëtan Nicodème* European Commission, Centre Emile Bernheim (Solvay Business School), ECARES (ULB) and CESifo. April 2009 Abstract: As any non-lump-sum tax, corporate income taxation creates distortions in economic choices, reducing its efficiency. This paper reviews some of these domestic and international distortions and their most recent estimates from the economic literature. Distortions originating from income shifting between capital and labour sources, profit shifting across jurisdictions, the effects of taxation on business location and foreign direct investment are the major sources of distortions. Keywords: Corporate taxation, distortions, tax efficiency. JEL classification: H25 * © The author. E-mail: gaetan.nicodeme @ ec.europa.eu. A French version of this paper has been published in the issue 'Fiscalité Internationale' of the 'Bulletin de documentation du SPF Finances' in Belgium under the title 'Impôt des sociétés et distorsions'. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They should not be attributed to the European Commission. 2 1. Introduction. Tax efficiency is a well-known concept in public finance. This notion is part of a wider debate on the principles and criteria for taxation. In particular, the equity and efficiency criteria are at the heart of public choices when it comes to taxation. Except for a few exceptions – on which we will come back – corporate taxation raises very little controversy in terms of equity and the debate is focussing on aspects of tax efficiency instead. Indeed, as a non lump-sum tax, corporate taxation introduces distortions in the choices of economic agents. This paper does not seek to analyse exhaustively and in details each and any of the economic distortions generated by corporate taxes or international differences in corporate tax rates and bases. This would require a more rigorous and in-depth analysis. Instead, we wish to draw the attention of the reader on the most important distortions and on their most recent estimates from the economic literature. The remainder of this article is organised as follows. The second section recalls the role of corporate taxation and the underlying economic reasons for having corporate income taxation. The third section introduces the domestic distortions of corporate taxation and the fourth section deals with international distortions linked to business and investment location and to profit shifting. Conclusions follow. 2. Why do we have corporate taxation? Before reviewing the distortions created by corporate taxation, it is useful to discuss the rationales for having a corporate income tax in the first place. Under some assumptions – in particular capital mobility – 'classic' economic models show that the optimal tax rate on capital for a small open economy is zero (Samuelson (1954), Tiebout (1956), Zodrow and Mieszkowski (1986), Wilson (1986)). Therefore, questioning the usefulness of corporate 3 taxation is a worthy exercise. Since Gordon (1992), several authors have looked into this question and the underlying pros and cons for the existence of corporate taxation (Weichenrieder (2005), de Mooij (2005), Sørensen (2007)). 2.1. Benefit principle. A first reason for having a corporate income tax is linked to the benefit principle. Akin to individuals, companies consume public goods – in particular infrastructures – and benefit from public interventions – such as education of workers or a judiciary system based on the rule-of-law. Therefore, it would seem normal that companies pay taxes as a compensation for those services. Some authors also argue that limited liability enjoyed by companies is an advantage that calls for a compensating tax. Those standpoints, even though attractive, are sometimes challenged because of the weak and rather indirect link between the use of those services and the determination of the corporate tax base, because companies are owned in fine by individuals who are also taxed, therefore introducing a risk of double-taxation, and because there are probably more direct ways of internalising the cost of the provision of those public goods, notably via user fees. 2.2. Tax exporting. A second argument is based on questioning the assumption of perfect mobility of capital. Mobility is a much more complex topic in the real world than models suggest. Because of sunk costs or relocation costs, capital may sometimes be relatively immobile. It is the same if, as suggested by Lee (1997), there are complementarities between capital and a less mobile factor. For example, money on a bank account (in theory mobile) may be used to pay workers of a mining company (therefore immobile). If, in addition, a non-negligible share of companies are owned by foreign shareholders, tax authorities have an incentive to tax these companies and 'export' the tax burden on those shareholders (Mintz (1994), Huizinga and Nielsen (1997)). Wildasin (2003) develops such a model with convex costs of relocating 4 capital (increasing with speed of relocation). He shows that the optimal capital tax rate at equilibrium is proportional to the share of foreign shareholding and inversely proportional to the degree of capital mobility. In an empirical study covering 34 European countries between 1996 and 2000, Huizinga and Nicodème (2006) show a strong positive relationship between the share of foreign shareholding in a country and the average corporate tax burden. Their estimate indicates that increasing the share of foreign ownership by one percentage point increases the average tax rate on companies by .43 percentage points on average. Imperfect capital mobility coupled with non-negligible foreign ownership would therefore explain the existence of corporate taxation. 2.3. Treasury effects. A third rationale is linked to so-called treasury effects generated by foreign tax credits. Several large countries such as the US and the UK apply tax credit systems to relief double- taxation on foreign income. Take a US multinational with a Belgian subsidiary. This subsidiary makes profit that is taxed at the Belgian corporate income tax at 33.99%. When the US parent repatriates the profit of the subsidiary, the dividend is taxed at the US federal corporate tax rate of 35%1. The US Company nevertheless receives a foreign tax credit of 33.99 on the tax already paid in Belgium, which it fully uses. The total tax burden is therefore 35% and fully determined by the tax rate applicable in the US. This example shows that with foreign tax credit systems in home countries, host countries are free to set their tax rates at the desired level (as long as they stay under the level of the home country) without having an impact on the total tax burden paid on repatriated dividends. 2.4. Erosion of personal income taxes. A fourth argument is that corporate taxation is useful to avoid the attrition of personal income taxation. Indeed, in the absence of corporate income tax, it would be interesting for 1 For the sake of simplicity, we ignore US state taxation and the withholding tax on the dividend. 5 individuals to incorporate and therefore avoid taxes on their income. Corporate taxation is hence considered to be a backstop for personal income taxation. We will come back to this point. 2.5. Political constraints. Finally, political constraints may play an important role. Corporations are often perceived by public opinion as entities making large profit and owned by wealthy investors, which generally qualifies them in the eyes of public opinion to bear an important share of the tax burden. In fact, corporate taxes represent only 3.4% of GDP for the EU-27 in 2006 and 8.5% of total tax collected. The corporate tax base is also smaller than the personal income tax base or the VAT base for example2. 3. Domestic distortions. 3.1. Deadweight loss. A first approach to evaluate economic distortions generated by corporate income taxation is to compute the deadweight loss (or Harberger Triangle). It represents the difference between the losses in consumer and producer surpluses and the tax collected. As a first proxy, deadweight loss as a percentage of tax collected is given by the formula tε/2, where t is the corporate tax rate and ε is the elasticity of the base to the rate. In 2008, the average corporate tax rate in the EU is 23.6%. In their study on profit shifting in Europe, Huizinga and Laeven (2008) estimate the elasticity of the corporate tax base to the rate at .45. This gives a deadweight loss in percentage of tax collected of 5.3%. 2 See De Laet (2008). 6 3.2. Administrative and compliance costs. Administrative and compliance costs are important elements of tax efficiency. These costs are complex to estimate and very few data is available. They have been estimated at 10% of the collected tax in the US, of which 1% represents the administrative costs (Aaron and Gale (1983), Slemrod and Sorum (1984)). This estimate is comparable to similar studies that find administrative costs of 1.16% for the UK (Godwin, 1995), 1.1% for Australia (Pope, 1995), 1.6% for France, .5% for the US, .52% for Sweden, .89% for Spain (Carmona, Guiffès and Lépine, 2006) and 1.53% for Czech Republic (Vitek and Pubal, 2002). These costs vary also with the tax considered. For the UK, Godwin (1995) finds administrative costs of .52% of collected taxes for corporate taxation, to be compared with 1.53% for personal income tax and social security contributions, 1.03% for VAT, .25% for customs duties, and .12% for taxes on fuels. For the Netherlands, de Kam (1998) finds relatively high ratios of 36.4% for wealth taxes, 17.6% for customs duties, 7.1% for environmental taxes, 6.2% for VAT, 5.1% for corporate taxation, and 4.8% for personal income taxation. Finally, in a study covering 700 EU companies, the European Commission (2004) finds ratios of 1.9% and 30.9% for large companies and SMEs respectively. Obviously, measures vary with the estimation technique, in particular with the assumptions on how to share common costs. Furthermore, those measures are averages and do not say anything on the marginal administrative cost of taxes. 3.3 Distortions generated by reduced corporate tax rates. As political economy instrument, corporate taxation has been at the heart of debates about its neutrality vis-à-vis the size of companies. Many countries indeed apply reduced corporate tax rates for SMEs. Two debates are being hold. The first one is about the rationale for having differentiated tax rates for SMEs. The second debate, which we will not discuss in 7 this paper, is linked to whether large companies pay a fair share of the tax burden3. Those two questions refer to both the equity and the efficiency aspects of corporate taxation. The wish of tax authorities to implement measures to decrease the tax burden of SMEs may find its rationales in trying to reach the most efficient allocation of resources. Some market failures may indeed be detrimental to SMEs and authorities might be tempted to compensate them, possibly by using taxation (OECD, 1994). First, SME may have difficulties to access credit and may suffer from higher interest rates because of asymmetry of information regarding their financial situation, a lack of reputation because of their small size, and because of possible differences in their obligations compared to large companies with regards to informing investors, for example in accounting practices (Beck, Demirgüç-Kunt, and Maksimovic, 2005). Next, it is possible that SMEs face higher difficulties to create economies of scale, which generates higher average costs and a lower profitability. Third, SMEs may also face larger difficulties to meet their needs in terms of highly-skilled staff because of a lack of visibility, which may decrease their performance. In addition to these market failures, SMEs may also suffer from regulatory failures due to complex taxation systems. This complexity and their relative lack of expertise may put them in a more difficult position than large companies when trying to optimise their tax burden. According to the OECD (1994), the arguments in favour of reduced corporate tax rates for SMEs are nevertheless weak. In particular, the measures to be taken may even make legislation been more complex, which increases costs for SMEs. Reduced corporate tax rates may also create distortions vis-à-vis the size of companies and act as a disincentive to grow. Alternative measures such as direct aid or a better functioning of credit markets are considered as more efficient. 3 See Nicodème (2007) for a recent discussion. 8 3.4. Distortions generated by a shift to labour. Another important distortion created by corporate taxation is the one induced on labour markets. This distortion is well-known in theory but is generally absent from the political debate. Economic theory shows that, under the assumption of mobility of capital, the incidence of the corporate tax is fully borne by labour (Gordon, 1986). Furthermore, this literature insists that capital flight reduces labour productivity and, in fine, wages. Hence, this creates an additional distortion which could be avoided if labour would be taxed directly. Recently, Arulampalam, Devereux, and Maffini (2007) have investigated this issue using a panel of more than 50,000 companies in nine European countries over 1996-2003. Their results suggest a validation of the theory as each additional euro of corporate tax reduces wages by 92 eurocents in the long-run. Therefore, the incidence of corporate taxation falls almost entirely on labour. 3.5. Distortions created by a shift from personal to corporate income taxes.. One last domestic economic distortion is linked to the possibility for some agents to requalify their labour income into capital income and vice versa. It is indeed possible for entrepreneurs to incorporate and to substitute in this way their labour income with corporate income, which is taxed at lower rates. This issue has mainly been studied for the United States. Makie-Mason and Gordon (1997) use data on the share of companies in capital between 1956 and 1986 and find that this share is positively influenced by the difference between the personal income tax and corporate income tax rates when companies are making profit. Goolsbee (2004) carries out a sectoral study for the US in 1992 and finds that an increase in the corporate tax rate by a tenth of a percent decreases the share of incorporated companies in the total number of firms by .25 percentage points and their share in sales and employment by .07 and .15 percentage points respectively. 9 For Europe, studies show similar effects. Fuest and Weichenrieder (2002) look at the share of corporate savings in total savings for 17 OECD countries between 1985 and 1997 and find that this share is positively related to the difference between personal and corporate income tax rates. Their results suggest that for each reduction in the corporate tax rate by one percentage-point, the share of corporate savings increases by 2.6%. Recently, de Mooij and Nicodème (2008) have used data on incorporation covering 17 European countries and 60 sectors between 1997 and 2003. Their study shows that the difference between the two tax rates exerts a significant positive impact on incorporation. The semi-elasticity in their study is 1, meaning that an increase by one percentage-point in the difference between the two rates leads on average to an increase in incorporation by 1%. This result has important consequences for tax policy. Between 12 and 21% of corporate income tax collected can be attributed to the difference between the average personal and corporate income tax rates. This difference is about 21 percentage points for Europe. Its increase has contributed to increase the ratio of corporate tax collected on GDP by .25%. Next, it also means that some of the consequences of corporate tax competition will materialise into an erosion of personal income taxes as many entrepreneurs take advantage of decreasing corporate tax rates to incorporate. The estimates by de Mooij and Nicodème (2008) show the importance of this distortion as each ex-ante increase of corporate taxes by 1 euro bring only 76 cents. The difference is shifted to personal income taxes. 4. International distortions. The efficiency of corporate income taxation and the distortions it generates are even more acute in an international context. The concepts of capital import neutrality and capital export neutrality are useful guides in this respect. Capital Export Neutrality (CEN) states that the tax burden shall be independent from the location of activities that generate taxable profit. 10 This is for example the case for residence-based taxation which will tax a specific investor at the same rate for all his/her investment wherever they occur. Location decisions are therefore not affected by taxes and, provided the pre-tax rate of return is the same everywhere, taxes will not distort capital allocation decisions. However, investors located in different countries will face different post-tax rates of return. Inversely, Capital Import Neutrality (CIN) states that the tax burden shall not depend on the location of investors. This is for example the case of source-based taxes.