How should corporate tax systems be reformed? Ruud A. de Mooij

Various debates on CIT CIT part of entire tax system  Abolish CIT  Consumption-based system: cash-flow tax  Uniform (business) income tax Systems of CIT  Current CIT π = Y – rD – δK  CBIT π = Y – δK  ACE π = Y – r(D+E) – δK European coordination  Harmonizing rates or bases

Theory helps Conceptual analysis of how to design the system  Tax economic rent, the full return to capital, or the full return to equity?  Treat limited liability different from sole proprietorships?  Respect international differences or achieve efficiency in the internal market? Key: how big are distortions?

Distortions in five dimensions Organisational form Corporate financial structure Multinational profit shifting Investment Foreign investment

Common indicator for effect size Semi-elasticity of the corporate tax base (ε)  B = corporate tax base τ = indicator of tax rate  What is the decline in revenue induced by a behavioural response? ε denotes lost tax revenue due to base erosion  Laffer curve (Clausing, 2007)

Semi-elasticity of the CT base MarginRelevant taxEffect size 1. Legal formCorporate vs. personal tax  Financial policyDebt/equity discrimination  Profit shiftingStatutory tax rate  InvestmentEMTR  Foreign investment a.IntensiveEMTR  0.4 b. ExtensiveEATR  0.7

Statement 1 “In reforming their corporate tax systems, European governments should account for international distortions more than for national distortions, as the former are relatively important” Or “International distortions in debt/equity, transfer prices & investment/location should guide national reforms”

Statement 2 “The growing size of international distortions over time induced by differences in corporate tax systems urges the need for European coordination” Or “Coordination should focus on issues where spillovers are largest, i.e. rates”