Corporate Tax Policy, Entrepreneurship and Incorporation in the EU

Ruud de Mooij and Gaëtan Nicodème

No 07-030/3, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: In Europe, declining corporate tax rates have come along with rising tax-to-GDP ratios. Thispaper explores to what extent income shifting from the personal to the corporate tax base canexplain these diverging developments. We exploit a panel of European data on firm births andlegal form of business to analyze income shifting via increased entrepreneurship andincorporation. The results suggest that lower corporate taxes exert an ambiguous effect onentrepreneurship. The effect on incorporation is significant and large. It implies that therevenue effects of lower corporate tax rates – possibly induced by tax competition -- partlyshow up in lower personal tax revenues rather than lower corporate tax revenues. Simulationssuggest that between 10% and 17% of corporate tax revenue can be attributed to incomeshifting. Income shifting is found to have raised the corporate tax-to-GDP ratio by some0.2%-points since the early 1990s.

This paper has been awarded the Peggy and Richard Musgrave Award 2007. See https://www.iipf.org/msgpz.htm. It has also led to a publication in International Tax and Public Finance .

Keywords: Corporate tax; Personal tax; Entrepreneurship; Incorporation; Income shifting (search for similar items in EconPapers)
JEL-codes: H25 L26 (search for similar items in EconPapers)
Date: 2007-03-22
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Related works:
Working Paper: Corporate tax policy, entrepreneurship and incorporation in the EU (2007)
Working Paper: Corporate Tax Policy, Entrepreneurship and Incorporation in the EU (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20070030

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