CE26 - Innovation, travail

Firm Taxation and Innovation in a Globalized World – InnovTax

Submission summary

Perhaps the most important development in tax policy globally over the past two decades is the steep decline in nominal corporate income tax rates. This phenomenon is most acute in the European Union where the overall average top nominal corporate tax rate has fallen from 35% to 22% between 1995 and 2016. Beyond the decline in nominal rates, tax planning by corporations has contributed further to the erosion of corporate tax revenues, an issue that has become particularly salient in the aftermath of the financial crisis.
Firms are subject to a large set of taxes, on their profits as well as their factors of production. As such their operations are deeply affected by tax policy. In turn, the behavior of firms and of multinational enterprises in particular shapes the environment in which national policy-makers decide on taxation. The goal of this project is to empirically study the two-way interactions between tax policy and firm behavior. To make progress in that direction, the project aims at providing robust empirical evidence on two specific questions:
(1) How do firms react to taxes directly affecting the marginal cost of investing? Beyond investment, what are the other relevant margins of adjustment (employment, plant opening and closure, R&D, prices). How can we relate results from microeconomic empirical studies of tax policy at the firm-level to aggregate outcomes?
(2) Going beyond national tax policy by studying, how does globalization restrict the leeway governments enjoy when devising tax policies at the national level?
To address these two questions, the project will use several French administrative datasets, many of which have were not available to academic researchers until recently, combined with transparent quasi-experimental research designs.
The first question will be answered empirically by exploiting variation in the cost of investment induced by a French fiscal reform that took place in 2010 (“réforme de la taxe professionelle”). The reform lowered overall taxes on businesses heterogeneously across firms. We will leverage this heterogeneity in a difference-in-differences (DiD) setting to estimate the firm-level effect of the reform. In order to relate firm-level responses to the aggregate impact of the reform, we will embed the DiD estimates to into a theoretical framework that will allow for spillovers across firms through competition and input-output linkages. Our original contribution will be to build a model whose micro-level predictions will be disciplined by quasi-experimental evidence, and that will allow us to deduce aggregate implications for our estimated relative effects.
To answer the second question, the study will look at how acquisition of French domestic firms by multinationals enterprises affects the effective tax paid by the acquired subsidiaries. To do so, it will use information on the structure of “economic” and crucially of “fiscal” groups, using a dataset that has been so far only used by the administration but to which we recently gained access. Considering the structure of French fiscal groups (“groupes intégrés fiscalement”) is key to compute accurately the corporate tax base and tax burden. The baseline empirical method will consist of an event-study which will trace out the evolution of the tax burden of French standalone firms around the time that they are acquired by an MNE. We will restrict the sample to firms that are acquired at some point over the sample period (2000-2017). Our identification will then solely rely on the timing of the acquisition. Once the overall impact of MNE status on tax avoidance will be quantified, the fineness of the data will allow for in-depth analysis of the mechanisms through which tax avoidance occurs, including but not limited to debt-shifting, optimized use tax code rules, relocation of intellectual property.

Project coordination

Clément Malgouyres (Ecole d'économie de Paris)

The author of this summary is the project coordinator, who is responsible for the content of this summary. The ANR declines any responsibility as for its contents.

Partner

PSE Ecole d'économie de Paris

Help of the ANR 187,920 euros
Beginning and duration of the scientific project: October 2019 - 24 Months

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