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Public Economics: Tax Avoidance
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Public Economics: Other
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Public Finance & Accounting
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NEW DRAFT: Tax Policy, Investment, and Profit Shifting
with Michael Devereux and Irem Guceri
Paper
Many multinational firms (MNEs) pay low or no corporation tax in high-tax countries because they shift taxable income to tax havens. We incorporate nonconvex costs of profit shifting and unobserved heterogeneity in profit-shifting ability in the MNEs' value maximization problem to study responses of firms to tax policies. We estimate our model using UK corporate tax returns data and quantify: (i) the elasticities of tax base and capital stock with respect to tax rates, (ii) the fixed and variable components of profit-shifting costs for different firm types, and (iii) the government's trade-off between raising tax revenue by reducing profit shifting and attracting investment. Accounting for extensive margin profit-reporting decisions, we reconcile most of the discrepancies between previous micro- and macro-level estimates of tax base elasticities. We test the predictions of the model using a quasi-natural experiment that restricted profit-shifting by Italian MNEs that operated in the UK and evaluate two types of tax policies that can be analyzed using our approach.
with Michael Devereux and Irem Guceri
Paper
Many multinational firms (MNEs) pay low or no corporation tax in high-tax countries because they shift taxable income to tax havens. We incorporate nonconvex costs of profit shifting and unobserved heterogeneity in profit-shifting ability in the MNEs' value maximization problem to study responses of firms to tax policies. We estimate our model using UK corporate tax returns data and quantify: (i) the elasticities of tax base and capital stock with respect to tax rates, (ii) the fixed and variable components of profit-shifting costs for different firm types, and (iii) the government's trade-off between raising tax revenue by reducing profit shifting and attracting investment. Accounting for extensive margin profit-reporting decisions, we reconcile most of the discrepancies between previous micro- and macro-level estimates of tax base elasticities. We test the predictions of the model using a quasi-natural experiment that restricted profit-shifting by Italian MNEs that operated in the UK and evaluate two types of tax policies that can be analyzed using our approach.
Comparing UK Tax Returns of Foreign Multinationals to Matched Domestic Firms
American Economic Review, 2019, 109(8), 2921-53
Paper
In this paper, I use confidential UK corporate tax returns data to explore whether there are systematic differences in the amount of taxable profits that multinational and domestic companies report. I find that the ratio of taxable profits to total assets reported by foreign multinational subsidiaries is half that of comparable domestic standalones. The majority of the difference is attributable to the fact that a higher proportion of foreign multinational subsidiaries report zero taxable profits. I document how the estimated difference is related to profit shifting and show that using accounting data leads to much smaller estimates of the difference.
Media: Financial Times
American Economic Review, 2019, 109(8), 2921-53
Paper
In this paper, I use confidential UK corporate tax returns data to explore whether there are systematic differences in the amount of taxable profits that multinational and domestic companies report. I find that the ratio of taxable profits to total assets reported by foreign multinational subsidiaries is half that of comparable domestic standalones. The majority of the difference is attributable to the fact that a higher proportion of foreign multinational subsidiaries report zero taxable profits. I document how the estimated difference is related to profit shifting and show that using accounting data leads to much smaller estimates of the difference.
Media: Financial Times
Organizational Capacity and Profit Shifting
Journal of Public Economics, 2024 October, Vol 238
NBER WP 29225 version
with Daniela Scur
Paper
This paper analyses the effect of a firm’s organizational capacity on the reported profitability of multinational enterprises (MNEs). Better organizational practices improve productivity and the potential taxable profits of firms. However, higher adoption of these practices may also enable more efficient allocation of profits across tax jurisdictions, lowering actual taxable profits. We present new evidence that MNE subsidiaries with better practices, when located in high-tax countries, report significantly lower profits and have a higher incidence of bunching around zero returns on assets. We show these results are driven by patterns consistent with profit-shifting behavior. Further, using an event study design, we find that firms with better practices are more responsive to corporate tax rate changes. Our results suggest organizational capacity, especially monitoring-related practices, enables firms to engage in shifting profits away from their high-tax subsidiaries.
Journal of Public Economics, 2024 October, Vol 238
NBER WP 29225 version
with Daniela Scur
Paper
This paper analyses the effect of a firm’s organizational capacity on the reported profitability of multinational enterprises (MNEs). Better organizational practices improve productivity and the potential taxable profits of firms. However, higher adoption of these practices may also enable more efficient allocation of profits across tax jurisdictions, lowering actual taxable profits. We present new evidence that MNE subsidiaries with better practices, when located in high-tax countries, report significantly lower profits and have a higher incidence of bunching around zero returns on assets. We show these results are driven by patterns consistent with profit-shifting behavior. Further, using an event study design, we find that firms with better practices are more responsive to corporate tax rate changes. Our results suggest organizational capacity, especially monitoring-related practices, enables firms to engage in shifting profits away from their high-tax subsidiaries.
Real Responses to Anti-Tax Avoidance Policies: Evidence from UK's Worldwide Debt Cap
Journal of Public Economics, 2022 vol 214
with Yaxuan Qi and Jing Xing
Paper
We analyze how multinational firms allocate real operations and debt across their affiliates in response to anti-tax avoidance policies. The UK introduced a worldwide debt cap in 2010, generating a quasi-natural experiment that limited interest deductibility for a group of firms. We find that multinationals affected by the reform reduced the amount of debt held in the UK and increased debt held abroad. Affected multinationals reallocated a share of their real operations away from the UK. Our findings provide causal evidence for tax-motivated debt and real activity reallocation within multinationals and show how multinationals can circumvent tax avoidance regulations.
Journal of Public Economics, 2022 vol 214
with Yaxuan Qi and Jing Xing
Paper
We analyze how multinational firms allocate real operations and debt across their affiliates in response to anti-tax avoidance policies. The UK introduced a worldwide debt cap in 2010, generating a quasi-natural experiment that limited interest deductibility for a group of firms. We find that multinationals affected by the reform reduced the amount of debt held in the UK and increased debt held abroad. Affected multinationals reallocated a share of their real operations away from the UK. Our findings provide causal evidence for tax-motivated debt and real activity reallocation within multinationals and show how multinationals can circumvent tax avoidance regulations.
Tax Avoidance Networks and the Push for a ’Historic’ Global Tax Reform
Tax Policy and the Economy, 2022 vol 37
with Michael Devereux and Irem Guceri
Paper:
In this paper, we investigate the use of intellectual property (IP) in multinationals' tax avoidance strategies. Income arising from intangible property is taxed in the location in which such income is received. Many multinationals (MNCs) therefore use tax havens as a base for IP ownership. We leverage a universe of global patent applications and transactions, combined with financial and ownership information, to investigate whether firms locate their patents in tax havens. We find evidence of disproportionate use of havens both in terms of applying for new patents, and purchasing existing patents. Tax havens such as Cayman Islands and Liechtenstein have substantially more patents per inhabitant than largest patenting nations, such as China and the US. 5% of patents in the European markets are held in tax havens and 30% of global cross border patent transactions within MNCs have buyers located in tax havens. We show a large role of firms potentially subject to the Global Minimum Tax in the innovation market. These firms constitute 2.6% of affiliates, but are responsible for 42% of all patent applications and 45% of tax haven ones.
Tax Policy and the Economy, 2022 vol 37
with Michael Devereux and Irem Guceri
Paper:
In this paper, we investigate the use of intellectual property (IP) in multinationals' tax avoidance strategies. Income arising from intangible property is taxed in the location in which such income is received. Many multinationals (MNCs) therefore use tax havens as a base for IP ownership. We leverage a universe of global patent applications and transactions, combined with financial and ownership information, to investigate whether firms locate their patents in tax havens. We find evidence of disproportionate use of havens both in terms of applying for new patents, and purchasing existing patents. Tax havens such as Cayman Islands and Liechtenstein have substantially more patents per inhabitant than largest patenting nations, such as China and the US. 5% of patents in the European markets are held in tax havens and 30% of global cross border patent transactions within MNCs have buyers located in tax havens. We show a large role of firms potentially subject to the Global Minimum Tax in the innovation market. These firms constitute 2.6% of affiliates, but are responsible for 42% of all patent applications and 45% of tax haven ones.
Fiscal Consequences of Corporate Tax Avoidance
R&R Journal of Public Economics
with Evgeniya Dubinina and Petr Jansky
Paper
VoxEU Column
Multinational corporations shift one third of their foreign profits to tax havens and, due to this corporate tax avoidance, governments worldwide lose hundreds of billions of dollars in tax revenue. In this paper, we analyze the consequences of tax avoidance for the structure of government tax revenues and their public finances. Specifically, we ask whether governments lower their expenditures, increase their deficits, raise more in corporate income taxes from non-multinational companies or raise more in other types of taxes, if multinationals in their countries shift more profits to tax havens. To establish causality, we use municipal-level data in Germany to exploit the variation in municipal tax rates and location of multinational subsidiaries and consequences of those for municipal corporate tax revenue structures.
R&R Journal of Public Economics
with Evgeniya Dubinina and Petr Jansky
Paper
VoxEU Column
Multinational corporations shift one third of their foreign profits to tax havens and, due to this corporate tax avoidance, governments worldwide lose hundreds of billions of dollars in tax revenue. In this paper, we analyze the consequences of tax avoidance for the structure of government tax revenues and their public finances. Specifically, we ask whether governments lower their expenditures, increase their deficits, raise more in corporate income taxes from non-multinational companies or raise more in other types of taxes, if multinationals in their countries shift more profits to tax havens. To establish causality, we use municipal-level data in Germany to exploit the variation in municipal tax rates and location of multinational subsidiaries and consequences of those for municipal corporate tax revenue structures.
Labor Market Consequences of Anti-Tax Avoidance Policies
International Tax and Public Finance , 2024
Paper
This project is funded by the Early Career Research grant from W.E. Upjohn Institute for Employment Research.
In this paper, I analyze the local labor market consequences of multinational firms reallocating employees across their affiliates in response to anti-tax avoidance policies. I leverage the introduction of a worldwide debt cap in 2010 in the UK as a quasi-natural experiment that limited one of the forms of profit shifting - debt shifting - for a group of multinational firms (MNCs). Multinationals affected by the reform reallocated their employees from the UK to foreign locations. This affected London-based service sector firms the most. I show that this resulted in a reduction in the number of jobs available in regions exposed to the reform in the UK. In foreign countries, the initial reallocation of labor across firms resulted in a much larger expansion of the affected local labor markets. These results suggest a reallocation of labor across firms generates asymmetries in how negative and positive firm-level shocks are amplified through regional markets.
International Tax and Public Finance , 2024
Paper
This project is funded by the Early Career Research grant from W.E. Upjohn Institute for Employment Research.
In this paper, I analyze the local labor market consequences of multinational firms reallocating employees across their affiliates in response to anti-tax avoidance policies. I leverage the introduction of a worldwide debt cap in 2010 in the UK as a quasi-natural experiment that limited one of the forms of profit shifting - debt shifting - for a group of multinational firms (MNCs). Multinationals affected by the reform reallocated their employees from the UK to foreign locations. This affected London-based service sector firms the most. I show that this resulted in a reduction in the number of jobs available in regions exposed to the reform in the UK. In foreign countries, the initial reallocation of labor across firms resulted in a much larger expansion of the affected local labor markets. These results suggest a reallocation of labor across firms generates asymmetries in how negative and positive firm-level shocks are amplified through regional markets.
Why Are the Contributions of Multinational Firms to Corporate Tax Revenue Declining?
Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(2), pages 401-426, April.
Paper
This paper explores reasons for the decline in the relative contributions of multinational firms to corporate tax revenues. Using a population of UK firms, I show that over the period 2000 - 2014 multinationals paid a declining fraction of corporate tax revenues, while expanding in size. In 2014 over 70% of total assets reported on UK company balance sheets were held by companies that paid no tax and were part of a multinational group. These firms have higher and increasing capital intensities than firms reporting positive profits, suggesting capital mobility plays an important role. At the same time the share of corporate tax revenues from domestic firms increased.
Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(2), pages 401-426, April.
Paper
This paper explores reasons for the decline in the relative contributions of multinational firms to corporate tax revenues. Using a population of UK firms, I show that over the period 2000 - 2014 multinationals paid a declining fraction of corporate tax revenues, while expanding in size. In 2014 over 70% of total assets reported on UK company balance sheets were held by companies that paid no tax and were part of a multinational group. These firms have higher and increasing capital intensities than firms reporting positive profits, suggesting capital mobility plays an important role. At the same time the share of corporate tax revenues from domestic firms increased.
With which Countries Do Tax Haven Share Information?
International Tax and Public Finance, April 2014, Volume 21, Issue 2, pp.175-197
with Clemens Fuest
Paper
In recent years tax havens and offshore financial centres have come under increasing political pressure to cooperate with other countries in matters of taxation and efforts to crowd back tax evasion and avoidance. As a result many tax havens have signed tax information exchange agreements (TIEAs). In order to comply with OECD standards tax havens are obliged to sign at least 12 TIEAs with other countries. This paper investigates how tax havens have chosen their partner countries. We ask whether they have signed TIEAs with countries to which they have strong economic links or whether they have systematically avoided doing this, so that information exchange remains ineffective. We analyse 565 TIEAs signed by tax havens in the years 2008–2011 and find that on average tax havens have signed more TIEAs with countries to which they have stronger economic links. Our analysis thus suggests that tax havens do not systematically undermine tax information exchange by signing TIEAs with irrelevant countries. However, this does not mean that they exchange information with all important partner countries.
International Tax and Public Finance, April 2014, Volume 21, Issue 2, pp.175-197
with Clemens Fuest
Paper
In recent years tax havens and offshore financial centres have come under increasing political pressure to cooperate with other countries in matters of taxation and efforts to crowd back tax evasion and avoidance. As a result many tax havens have signed tax information exchange agreements (TIEAs). In order to comply with OECD standards tax havens are obliged to sign at least 12 TIEAs with other countries. This paper investigates how tax havens have chosen their partner countries. We ask whether they have signed TIEAs with countries to which they have strong economic links or whether they have systematically avoided doing this, so that information exchange remains ineffective. We analyse 565 TIEAs signed by tax havens in the years 2008–2011 and find that on average tax havens have signed more TIEAs with countries to which they have stronger economic links. Our analysis thus suggests that tax havens do not systematically undermine tax information exchange by signing TIEAs with irrelevant countries. However, this does not mean that they exchange information with all important partner countries.
Profit Shifting and Corruption
International Tax and Public Finance, 2020, Volume 27, pp.1051-1080
with André Seidel
Paper
This paper introduces heterogeneous profit shifting costs induced by corrupt tax officials to analyse the effects of corruption on profit shifting of multinationals. Using a theoretically derived corruption weighted tax differential, we show that corruption increases profit shifting of European firms. We use our estimates to calculate the implied tax revenue elasticities for European countries and find that countries with otherwise similar tax rates face lower tax revenue elasticities when they are more corrupt. This means that corruption negatively affects the revenue gains that countries could have from increasing their tax rates.
International Tax and Public Finance, 2020, Volume 27, pp.1051-1080
with André Seidel
Paper
This paper introduces heterogeneous profit shifting costs induced by corrupt tax officials to analyse the effects of corruption on profit shifting of multinationals. Using a theoretically derived corruption weighted tax differential, we show that corruption increases profit shifting of European firms. We use our estimates to calculate the implied tax revenue elasticities for European countries and find that countries with otherwise similar tax rates face lower tax revenue elasticities when they are more corrupt. This means that corruption negatively affects the revenue gains that countries could have from increasing their tax rates.
NEW DRAFT: The Elasticity of Taxable Income Across Countries
with Claudio A. Agostini Laurent Bach Pierre Bachas Govindadeva Bernier, Marinho Bertanha Anne Brockmeyer Jaroslav Bukovina Yuxuan He Evangelos Koumanakos Tomas Lichard Jan Palguta Elena Patel Louis Perrault Nathan Seegert Kristina Strohmaier Maximilian Todtenhaupt Branislav Zudel
Paper
We use administrative tax data from 17 developed and developing countries to calculate the within-country corporate elasticity of taxable income (ETI) and investigate differences between these estimates. We develop a new structural empirical method using the observed distribution of taxable income that exploits the differential tax treatment of business income for firms earning positive and negative taxable income. Our ETI estimates range between 1.9 for Canada and 0.04 for Uruguay, and these differences are much smaller than the range found in the literature (0 to 5). We use our estimates, a large set of predictors, and a random forest estimation to provide out-of-sample ETI estimates for 248 countries and find an average elasticity of 0.59. We then show differences in elasticities across countries are explained by country characteristics (52%), tax system characteristics (31%), and firm characteristics (16%).
with Claudio A. Agostini Laurent Bach Pierre Bachas Govindadeva Bernier, Marinho Bertanha Anne Brockmeyer Jaroslav Bukovina Yuxuan He Evangelos Koumanakos Tomas Lichard Jan Palguta Elena Patel Louis Perrault Nathan Seegert Kristina Strohmaier Maximilian Todtenhaupt Branislav Zudel
Paper
We use administrative tax data from 17 developed and developing countries to calculate the within-country corporate elasticity of taxable income (ETI) and investigate differences between these estimates. We develop a new structural empirical method using the observed distribution of taxable income that exploits the differential tax treatment of business income for firms earning positive and negative taxable income. Our ETI estimates range between 1.9 for Canada and 0.04 for Uruguay, and these differences are much smaller than the range found in the literature (0 to 5). We use our estimates, a large set of predictors, and a random forest estimation to provide out-of-sample ETI estimates for 248 countries and find an average elasticity of 0.59. We then show differences in elasticities across countries are explained by country characteristics (52%), tax system characteristics (31%), and firm characteristics (16%).
Dividend Taxation and Firm Performance with Heterogeneous Payout Responses
forthcoming at AEJ: Economic Policy
with Irem Guceri and Evangelos Kumanakos
Paper
We analyze the performance of firms that were differentially affected by an unexpected tax on dividends before the Global Financial Crisis. We use exogenous policy variation for firms with different legal statuses and financial year-end dates to separately identify the policy announcement and implementation effects. We provide causal evidence for a sharp drop in dividends, but zero change in equipment purchases. Treated firms accumulate investment goods that are likely to be owner-manager’s personal assets instead of productive capital. At a time of severe liquidity shortage, some of the funds kept in the firm are used to pay back short-term debt.
forthcoming at AEJ: Economic Policy
with Irem Guceri and Evangelos Kumanakos
Paper
We analyze the performance of firms that were differentially affected by an unexpected tax on dividends before the Global Financial Crisis. We use exogenous policy variation for firms with different legal statuses and financial year-end dates to separately identify the policy announcement and implementation effects. We provide causal evidence for a sharp drop in dividends, but zero change in equipment purchases. Treated firms accumulate investment goods that are likely to be owner-manager’s personal assets instead of productive capital. At a time of severe liquidity shortage, some of the funds kept in the firm are used to pay back short-term debt.
How Distortive Are Turnover taxes? Evidence from China.
Journal of Development Economics, 2024 October, vol 171
NBER WP version
with Jing Xing, Sepideh Raei, and Xipei Hou
Paper
We investigate the impact of tax cascading on upstream and downstream firms. As a natural experiment, we explore a reform that replaced turnover taxes with value-added taxes for service industries in China, which effectively removed tax cascading. We find a relative increase in sales, R&D investment, and employment for affected service firms. These changes are mainly driven by increased outsourcing from manufacturing firms, and are unlikely to be caused by changes in firms’ tax burden or output prices. Our study provides new evidence on how taxation affects supplier networks and firm performance.
Journal of Development Economics, 2024 October, vol 171
NBER WP version
with Jing Xing, Sepideh Raei, and Xipei Hou
Paper
We investigate the impact of tax cascading on upstream and downstream firms. As a natural experiment, we explore a reform that replaced turnover taxes with value-added taxes for service industries in China, which effectively removed tax cascading. We find a relative increase in sales, R&D investment, and employment for affected service firms. These changes are mainly driven by increased outsourcing from manufacturing firms, and are unlikely to be caused by changes in firms’ tax burden or output prices. Our study provides new evidence on how taxation affects supplier networks and firm performance.
Output Distortions and the Choice of Legal Form of Organization
Economic Modeling, February 2023, vol 37
with Sepideh Raei
Paper
We study distortions to aggregate output created by the differential tax treatment of corporations and pass-through entities. We develop a firm dynamic model in which the legal form of organization is an endogenous choice for firms facing trade-offs between the tax treatment of business income, access to external capital, and the evolution of productivity over time. We match this model to features of the US economy and find that equalizing tax treatments across legal forms while keeping tax revenue constant leads to a 6.8% increase in aggregate output. The reallocation of capital between firms accounts for about 40% of this increase. Our findings suggest that unifying the tax treatment of different legal forms creates output gains while maintaining the existing structure of the tax system. It may be politically easier to implement this type of reform than removing corporate tax entirely.
Economic Modeling, February 2023, vol 37
with Sepideh Raei
Paper
We study distortions to aggregate output created by the differential tax treatment of corporations and pass-through entities. We develop a firm dynamic model in which the legal form of organization is an endogenous choice for firms facing trade-offs between the tax treatment of business income, access to external capital, and the evolution of productivity over time. We match this model to features of the US economy and find that equalizing tax treatments across legal forms while keeping tax revenue constant leads to a 6.8% increase in aggregate output. The reallocation of capital between firms accounts for about 40% of this increase. Our findings suggest that unifying the tax treatment of different legal forms creates output gains while maintaining the existing structure of the tax system. It may be politically easier to implement this type of reform than removing corporate tax entirely.
The Effect of Loss Offset Provisions on the Asymmetric Behavior of Corporate Tax Revenues in the Business Cycle
National Tax Journal, March 2019, vol 72, issue 1, pp. 45-78
Paper
This paper estimates the response of corporate tax revenues to the business cycle and calculates a heterogeneous asymmetry in the tax revenue responses between booms and recessions using a new index of loss offset generosity provisions. I find strong short-run contemporaneous impact of business cycle on corporate tax revenues and a persistent asymmetric response of corporate tax revenues to booms and recession. Loss offset generosity provisions enhance this asymmetry. Countries with more generous loss offset provisions experience much more volatile response of corporate tax revenues to business cycle during recessions, magnifying the asymmetry of cyclicality. As a result the automatic stabilizer impact of corporation tax will differ between booms and recessions, being stronger and more effective in the latter, especially in countries that offer more generous loss-offset provisions.
National Tax Journal, March 2019, vol 72, issue 1, pp. 45-78
Paper
This paper estimates the response of corporate tax revenues to the business cycle and calculates a heterogeneous asymmetry in the tax revenue responses between booms and recessions using a new index of loss offset generosity provisions. I find strong short-run contemporaneous impact of business cycle on corporate tax revenues and a persistent asymmetric response of corporate tax revenues to booms and recession. Loss offset generosity provisions enhance this asymmetry. Countries with more generous loss offset provisions experience much more volatile response of corporate tax revenues to business cycle during recessions, magnifying the asymmetry of cyclicality. As a result the automatic stabilizer impact of corporation tax will differ between booms and recessions, being stronger and more effective in the latter, especially in countries that offer more generous loss-offset provisions.
Measuring Firm Activity from Outer Space
R&R at Journal of Economic Geography
NBER WP version
with Andre Seidel
Paper
How much do we know about firm activities around the world? To understand global firm networks and how they operate, we need consistent information about their activities that is not biased by firm reporting choices. In this paper, we provide such data. We collect a novel dataset on factory land consumption and the light these factories produce at night for a large sample of car manufacturing plants. We show that we can measure firm activity with this data, using annual firm financial data and high-frequency data related to Covid-19 pandemic production shocks. We use this data to quantify the extent of unreported global profits and show the asset allocation across subsidiaries of multinational firms (MNEs) that is not biased by profit shifting.
R&R at Journal of Economic Geography
NBER WP version
with Andre Seidel
Paper
How much do we know about firm activities around the world? To understand global firm networks and how they operate, we need consistent information about their activities that is not biased by firm reporting choices. In this paper, we provide such data. We collect a novel dataset on factory land consumption and the light these factories produce at night for a large sample of car manufacturing plants. We show that we can measure firm activity with this data, using annual firm financial data and high-frequency data related to Covid-19 pandemic production shocks. We use this data to quantify the extent of unreported global profits and show the asset allocation across subsidiaries of multinational firms (MNEs) that is not biased by profit shifting.
The Effects of Fiscal Consolidation on Short-Term Growth: A Review and Implications for the UK
Chapter in ''Taxation and the Financial Crisis" edited by J. Althworth and G. Arachi, Oxford University Press, 2012
with Michael Deveruex and Clemens Fuest
Book Chapter
This chapter analyses the economic situation in the UK as it attempts to recover from the financial and economic crisis that began in 2008. In particular, we focus on the probability that the fiscal consolidation, introduced by the new coalition government in 2010, is likely to be expansionary or contractionary. To analyse this we first briefly survey the large economic literature on the impact of government borrowing on economic growth. We identify the key factors that empirical evidence suggests affect the probability that a fiscal consolidation will be expansionary. We then examine these factors in the context of the UK to identify whether they are favourable or not towards the consolidation being expansionary.
Chapter in ''Taxation and the Financial Crisis" edited by J. Althworth and G. Arachi, Oxford University Press, 2012
with Michael Deveruex and Clemens Fuest
Book Chapter
This chapter analyses the economic situation in the UK as it attempts to recover from the financial and economic crisis that began in 2008. In particular, we focus on the probability that the fiscal consolidation, introduced by the new coalition government in 2010, is likely to be expansionary or contractionary. To analyse this we first briefly survey the large economic literature on the impact of government borrowing on economic growth. We identify the key factors that empirical evidence suggests affect the probability that a fiscal consolidation will be expansionary. We then examine these factors in the context of the UK to identify whether they are favourable or not towards the consolidation being expansionary.
NEW DRAFT: Life after leak: Managing the effects of offshore data leaks on firms' operations
with Simone Traini
Paper
We examine the impact of tax haven data leaks on the real activities of exposed firms. Using a comprehensive sample of multinational firms across several different leaks, we show that after the leak firms appoint more directors, especially those in finance or accounting functions, pay higher dividends, and reduce their tax haven operations. In addition, we find that their effective tax rates are lower in the post-leak period, suggesting that firms' reorganizational efforts result in a lower tax burden. We investigate two mechanisms that could be driving firm responses in our setting: mitigating the loss of competitive advantage and mitigating reputational losses. We find evidence consistent with the latter channel, and our results also suggest that reputation-building policies benefit shareholders.
with Simone Traini
Paper
We examine the impact of tax haven data leaks on the real activities of exposed firms. Using a comprehensive sample of multinational firms across several different leaks, we show that after the leak firms appoint more directors, especially those in finance or accounting functions, pay higher dividends, and reduce their tax haven operations. In addition, we find that their effective tax rates are lower in the post-leak period, suggesting that firms' reorganizational efforts result in a lower tax burden. We investigate two mechanisms that could be driving firm responses in our setting: mitigating the loss of competitive advantage and mitigating reputational losses. We find evidence consistent with the latter channel, and our results also suggest that reputation-building policies benefit shareholders.
Tax strategy disclosure: A greenwashing mandate?
R&R at Journal of Accounting Research
with Elisa Casi, Carol Seregni and Barbara Stage
Paper
TaxNotes Coverage
We investigate the effects of a qualitative tax disclosure mandate aimed at improving tax transparency and compliance by imposing reputational costs for firms. We use, as an exogenous shock, the 2016 UK reform that required large businesses to disclose their tax strategy. We find that treated firms—those that must publish a tax strategy report—also significantly increase the volume of tax strategy disclosure in their annual reports but this disclosure contains more boilerplate. The standalone tax strategy reports contain narratives similar to those in the annual reports, are sticky, and their quality is correlated with those of disclosures on gender and human rights. Turning to real behavioral changes, we document no significant effect on tax planning across several proxies and firm characteristics. While we find that the mandate increased media attention on treated firms, our results suggest that this enforcement channel might not work in the context of qualitative disclosure, which may be hard to verify for outside stakeholders. Even in subsamples of firms that we would expect to behave differently, we document similar responses. Taken together, our findings indicate that mandating qualitative tax disclosure has incentivized firms to portray themselves as good tax citizens without changing their practices.
R&R at Journal of Accounting Research
with Elisa Casi, Carol Seregni and Barbara Stage
Paper
TaxNotes Coverage
We investigate the effects of a qualitative tax disclosure mandate aimed at improving tax transparency and compliance by imposing reputational costs for firms. We use, as an exogenous shock, the 2016 UK reform that required large businesses to disclose their tax strategy. We find that treated firms—those that must publish a tax strategy report—also significantly increase the volume of tax strategy disclosure in their annual reports but this disclosure contains more boilerplate. The standalone tax strategy reports contain narratives similar to those in the annual reports, are sticky, and their quality is correlated with those of disclosures on gender and human rights. Turning to real behavioral changes, we document no significant effect on tax planning across several proxies and firm characteristics. While we find that the mandate increased media attention on treated firms, our results suggest that this enforcement channel might not work in the context of qualitative disclosure, which may be hard to verify for outside stakeholders. Even in subsamples of firms that we would expect to behave differently, we document similar responses. Taken together, our findings indicate that mandating qualitative tax disclosure has incentivized firms to portray themselves as good tax citizens without changing their practices.
Are Financing Constraints Binding for Investment? Evidence from Natural Experiment
Journal of Economic Behavior & Organization, 2020, vol 177, pp 618-640
Paper
Online Appendix
This paper shows that the availability of cash flows dominates the effects of cost of capital for investment at the firm level. Using an exogenous tax reform in Canada as a quasi-natural experiment, I find that a temporary and unexpected increase in the cost of capital for firms with low availability of retained earnings has no effect on investment of those firms. A subsequent direct increase in the availability of cash flows has large effects on investment. This suggests that internal financing constraints are binding for firms, as they prefer to use low cost retained earnings to finance their investment.
Journal of Economic Behavior & Organization, 2020, vol 177, pp 618-640
Paper
Online Appendix
This paper shows that the availability of cash flows dominates the effects of cost of capital for investment at the firm level. Using an exogenous tax reform in Canada as a quasi-natural experiment, I find that a temporary and unexpected increase in the cost of capital for firms with low availability of retained earnings has no effect on investment of those firms. A subsequent direct increase in the availability of cash flows has large effects on investment. This suggests that internal financing constraints are binding for firms, as they prefer to use low cost retained earnings to finance their investment.
Tax Avoidance Regulations and Stock Market Responses
Journal of International Financial Markets, Institutions & Money, 2022, Elsevier,vol.77(C)
with Yaxuan Qi and Danjue Shang
Paper
In this paper, we examine the effects of tax avoidance regulations on stock returns and crash risk of multinational corporations (MNCs). We use the introduction of the worldwide debt cap reform in 2010 in the UK that limited the extent of profit shifting for a group of multinational firms as a quasi-natural experiment. We find that MNCs affected by the reform have higher stock market returns and are subject to lower crash risks than unaffected MNCs after the reform. Our results suggest that stock market investors perceive anti-tax avoidance regulation positively, especially in case of firms with lower quality of corporate governance before the reform. Complimentary to that, we find a larger stock market response for MNCs with access to tax haven affiliates. Our findings are consistent with the notion that anti-tax avoidance regulation is perceived by investors as a tool to help curb aggressive tax planning and improve information transparency, especially in the environments where this transparency is lower.
Journal of International Financial Markets, Institutions & Money, 2022, Elsevier,vol.77(C)
with Yaxuan Qi and Danjue Shang
Paper
In this paper, we examine the effects of tax avoidance regulations on stock returns and crash risk of multinational corporations (MNCs). We use the introduction of the worldwide debt cap reform in 2010 in the UK that limited the extent of profit shifting for a group of multinational firms as a quasi-natural experiment. We find that MNCs affected by the reform have higher stock market returns and are subject to lower crash risks than unaffected MNCs after the reform. Our results suggest that stock market investors perceive anti-tax avoidance regulation positively, especially in case of firms with lower quality of corporate governance before the reform. Complimentary to that, we find a larger stock market response for MNCs with access to tax haven affiliates. Our findings are consistent with the notion that anti-tax avoidance regulation is perceived by investors as a tool to help curb aggressive tax planning and improve information transparency, especially in the environments where this transparency is lower.