Impact of Tax Rate Cut Cum Base Broadening Reforms on Heterogeneous Firms – Learning from the German Tax Reform 2008

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp10036.pdf Non-technical summaryThis paper presents a new corporate microsimulation model, ZEW TaxCoMM, which allows for the coherent micro-based analysis (ex ante and ex post) of reform induced revenue implications and the distribution of the tax burden between firms of different characteristics. In this paper, ZEW TaxCoMM is employed to evaluate the consequences of the 2008 German corporate tax reform.The German corporate tax reform of 2008 has brought about important cuts in corporate tax rates, which were at the same time accompanied by significant changes in the determination of the tax base for both major German corporate taxes -corporate income tax and trade tax. The reform followed the distinct and internationally prevalent pattern of tax rate cut cum base broadening. Hence, the results on the distribution of the tax burden according to firm characteristics stand exemplarily for those reforms which follow a similar pattern. Especially in view of the current economic crisis, questions on the distribution of the tax burden among firms of different characteristics have arisen and still remain at the heart of the academic and political debate in Germany and other countries.As a result, the ZEW TaxCoMM simulations show that less than 5% of all corporations did not benefit from the 2008 German corporate tax reform. The average annual relief as measured by the average decline in the effective tax burden on cash flows amounts to 2.8 percentage points for large corporations and to 6 percentage points for small corporations. Clearly, small firms benefited more. As to tax revenues, the reform induced decrease amounts to € 9.8 billion. The decline in tax revenues is more important for the corporate income tax. The trade tax thus gains fiscally in importance.Furthermore, the simulation illustrates that firms with low profitability, high debt ratio and high capital intensity benefit least from the reform. This is a consequence of the reform detaching the tax base from profits by banning the deduction of business expenses. This additionally endangers the existence of firms in times of massive economic downturn. Indeed, policy makers in Germany and other countries reacted by modifying the most harmful regulations which implied the taxation of economic worth instead of profits. Abstract: The German corporate tax reform of 2008 has brought about important cuts in corporate tax rates, w...

Assessing the Impact of Introducing an ACE Regime - A Behavioural Corporate Microsimulation Analysis for Germany

“…For our analysis we apply the behavioural corporate microsimulation model ZEW TaxCoMM (Finke et al (2013)). The basic idea of the model is to derive tax payments for a reference and reform scenario from a broad firm-level dataset of financial accounts.…”

“…The firm level effects are aggregated determine tax revenue effects. To assess reform consequences comprehensively, the model takes behavioural responses to changes in tax incentives into account (for a detailed description please refer to Finke et al (2013)). At the micro-level, we consider the extent to which tax law changes affect firms' financing structure, marginal investments, and profit shifting activity.…”

“…Now, we augment the analysis by behavioural responses induced by the changes in the tax code. We describe our approach to incorporate behavioural responses in section 2 and in Finke et al (2013). As a first step of this analysis consists, we analyze how the ACE regime affect the incentives for investment, capital structure and profit shifting and to what extent this change induces responses at these decision margins at the micro-level.…”

“…The analysis is based on the behavioural corporate microsimulation model ZEW TaxCoMM (Finke et al (2013)). We illustrate the heterogeneous impact of this reform on firm-level tax payments and compute aggregate revenue effects.…”

Economic integration and the optimal corporate tax structure with heterogeneous firms

“…These papers, however, focus solely on tax rate competition and do not endogenize the simultaneous determination of the corporate tax base. Finally, Finke et al (2010) perform a microsimulation analysis to evaluate the impact of the German 2008 corporate tax reform, which followed a pattern of tax rate cut cum base broadening, on heterogeneous firms. They show that firms with low productivity benefitted least from the reform, because they were hit most by the reduction of depreciation allowances.…”