Periodic Reporting for period 1 - U-CORP-TAX (Understanding Corporate Taxation)
Reporting period: 2023-04-01 to 2025-03-31
Corporate taxation is a key area of policy-making. It governs tax revenues but also has other objectives, such as attracting foreign investment or correcting externalities (e.g. underinvestment in R&D or polluting behaviors). In this case, Pigouvian taxes can help align incentives and maximize social welfare. However, little is known about how firms react to changes in the corporate tax environment, especially when it comes to micro-level evidence. Among all firms, the reaction of large firms, in particular, is of key importance for several reasons. First, despite being very few, large firms account for a significant share of economic activity (profits, employment, or investment). For instance, the 100 biggest French firms (top 0.01%) accounted for 22% of the value-added created in France from 1993 to 2007. Therefore, the behavior of a few firms largely influences aggregate outcomes. Second, they have more margins of adjustment than smaller firms: they have multiple establishments, have cross-border activity, and might avoid taxation through affiliates in tax havens. All of these channels can be used to mitigate corporate tax shocks.
More empirical evidence is needed to understand how corporate taxation affects these firms. Indeed, different reforms of corporate tax systems have been recently applied and discussed at both national and international levels. At national levels, several policies have recently been implemented or will be implemented in the future in Spain (2016), the U.S. (2017), France (2017 to 2022), or Austria (planned in 2024). At the global level, an ambitious reform of the international corporate tax system was agreed by more than 130 countries in October 2021, following negotiations organized by the OECD. This reform will be implemented soon (the EU institutions are currently drafting directives for the implementation of this reform) and is expected to have large consequences on corporate activity, particularly on large multinational enterprises (MNEs hereafter). The European Union has also undertaken significant corporate tax reforms or projects: the taxation of digital activities, anti-tax avoidance directives (ATAD directives), the discussion of formula apportionment in the Common Consolidated Corporate Tax Base (CCCTB) project. Following the Commission’s Communication on Business Taxation for the 21st Century adopted in May 2021, the EU will propose in 2023 a new framework called “Business in Europe: Framework for Income Taxation” (BEFIT), which will replace CCCTB. It aims to propose a common corporate taxation framework that goes beyond the OECD agreement. Finally, the Covid crisis and the recent inflation surge have generated many debates and new regulations about the exceptional taxation of large firms' “super”-profits.
Tax reforms have real effects: they affect the real decisions of firms, such as wages, employment, or investment. They must be thought beyond their immediate impact on tax revenues. Essential information to understand the effects of these reforms and to evaluate the impact of future reforms is how firms react on different margins: the location of their productive activity, the wages they pay, their investment, and the location of their profits. Knowing the elasticity of these different variables to taxation is key to understanding corporate tax reforms and will contribute to knowledge-based policy-making. The importance of these reactions cannot be overstated. They affect public finance and, therefore, the provision of public goods. They have macroeconomic impacts through their effect on wages, investment, and tax revenues. They have political and distributional consequences through their impact on public good provision, wages, and investment. Knowing how firms respond to corporate taxation can also inform about its incidence and indicate who bears the costs of corporate taxes?
How do firms react to corporate taxation? Through which channels? What are the distributional consequences of these responses to corporate taxation? To answer these questions, U-CORP-TAX will leverage a unique policy experiment: the introduction of the exceptional taxation of large French firms from 2011 to 2016 (more than €250 millions in turnover). It will use the rich French firm-level administrative data to examine it. To my knowledge, this project will be the first to exploit this natural experiment. This exceptional tax increased targeted firms’ statutory tax rate from 33.33% to 35% until 2014 and to 36.9% until 2016. It provides a unique set-up that is well-suited for our objectives for several reasons. First, as a large tax change, it is likely to trigger real responses from firms (+1.7 percentage points or +3.6 percentage points depending on the year). Second, contrary to most of the literature that exploits subnational variation, it is applied at the national level. The threshold used in the reform is also interesting because it concerns only large firms (according to the French Senate, it targets 18,000 firms owned by 1250 corporate groups). Importantly, the policy characteristics imply that observationally similar firms might pass or not the threshold according to their tax consolidation status (see 1.2 for details). This framework provides a unique opportunity to study the causal impact of a country-wide change in corporate taxation.
More empirical evidence is needed to understand how corporate taxation affects these firms. Indeed, different reforms of corporate tax systems have been recently applied and discussed at both national and international levels. At national levels, several policies have recently been implemented or will be implemented in the future in Spain (2016), the U.S. (2017), France (2017 to 2022), or Austria (planned in 2024). At the global level, an ambitious reform of the international corporate tax system was agreed by more than 130 countries in October 2021, following negotiations organized by the OECD. This reform will be implemented soon (the EU institutions are currently drafting directives for the implementation of this reform) and is expected to have large consequences on corporate activity, particularly on large multinational enterprises (MNEs hereafter). The European Union has also undertaken significant corporate tax reforms or projects: the taxation of digital activities, anti-tax avoidance directives (ATAD directives), the discussion of formula apportionment in the Common Consolidated Corporate Tax Base (CCCTB) project. Following the Commission’s Communication on Business Taxation for the 21st Century adopted in May 2021, the EU will propose in 2023 a new framework called “Business in Europe: Framework for Income Taxation” (BEFIT), which will replace CCCTB. It aims to propose a common corporate taxation framework that goes beyond the OECD agreement. Finally, the Covid crisis and the recent inflation surge have generated many debates and new regulations about the exceptional taxation of large firms' “super”-profits.
Tax reforms have real effects: they affect the real decisions of firms, such as wages, employment, or investment. They must be thought beyond their immediate impact on tax revenues. Essential information to understand the effects of these reforms and to evaluate the impact of future reforms is how firms react on different margins: the location of their productive activity, the wages they pay, their investment, and the location of their profits. Knowing the elasticity of these different variables to taxation is key to understanding corporate tax reforms and will contribute to knowledge-based policy-making. The importance of these reactions cannot be overstated. They affect public finance and, therefore, the provision of public goods. They have macroeconomic impacts through their effect on wages, investment, and tax revenues. They have political and distributional consequences through their impact on public good provision, wages, and investment. Knowing how firms respond to corporate taxation can also inform about its incidence and indicate who bears the costs of corporate taxes?
How do firms react to corporate taxation? Through which channels? What are the distributional consequences of these responses to corporate taxation? To answer these questions, U-CORP-TAX will leverage a unique policy experiment: the introduction of the exceptional taxation of large French firms from 2011 to 2016 (more than €250 millions in turnover). It will use the rich French firm-level administrative data to examine it. To my knowledge, this project will be the first to exploit this natural experiment. This exceptional tax increased targeted firms’ statutory tax rate from 33.33% to 35% until 2014 and to 36.9% until 2016. It provides a unique set-up that is well-suited for our objectives for several reasons. First, as a large tax change, it is likely to trigger real responses from firms (+1.7 percentage points or +3.6 percentage points depending on the year). Second, contrary to most of the literature that exploits subnational variation, it is applied at the national level. The threshold used in the reform is also interesting because it concerns only large firms (according to the French Senate, it targets 18,000 firms owned by 1250 corporate groups). Importantly, the policy characteristics imply that observationally similar firms might pass or not the threshold according to their tax consolidation status (see 1.2 for details). This framework provides a unique opportunity to study the causal impact of a country-wide change in corporate taxation.
Due to the early termination of the project I only had the time to focus on the construction of a new dataset composed on French administrative data. French administrative data has the advantage of enabling the matching of different datasets using a unique identifier. This allows us to observe the tax data of the universe of French firms (FARE and BIC-BRN datasets), matched with employee data (BTS-Postes dataset) and rich ownership data (CEP and LIFI datasets). In particular, this dataset allows me to observe fiscal data on wages, employment, investment, profits, taxes, firms’ ownership networks, and tax consolidation status. To my knowledge, this last information (coming from the PERIM and FDG datasets) has not been previously used in the academic literature.
The first step was to apply through the French Centre d'Accès Sécurisé aux Données (CASD) to obtain the access to the data. Then, there is an important work of merging and cleaning to obtain a working dataset. I concentrated on these two tasks.
I also carried out a systematic review of the literature on the impact of business taxation. This work was accompanied by the acquisition of new skills in two key areas of the project: on the one hand, causal inference, which is necessary for setting up the project's identification strategy, and on the other, the rules of the corporate tax system in France, which is necessary for gaining detailed knowledge of the project's institutional context.
The first step was to apply through the French Centre d'Accès Sécurisé aux Données (CASD) to obtain the access to the data. Then, there is an important work of merging and cleaning to obtain a working dataset. I concentrated on these two tasks.
I also carried out a systematic review of the literature on the impact of business taxation. This work was accompanied by the acquisition of new skills in two key areas of the project: on the one hand, causal inference, which is necessary for setting up the project's identification strategy, and on the other, the rules of the corporate tax system in France, which is necessary for gaining detailed knowledge of the project's institutional context.
Unfortunately, due to the early termination of the grant, the project have not lead to any significant results. However, the work carried out as part of this project, which consisted of building an administrative database on French companies and their taxation, will be a key asset for future ambitious work on corporate taxation and its consequences.