Periodic Reporting for period 1 - TAXGLOBAL (Understanding the global effect of corporate tax reforms)
Berichtszeitraum: 2020-07-15 bis 2022-07-14
The taxation of multinational firms is a hotly debated subject in economic policy. For example, the 2017 tax reform in the U.S. is supposed to have large effects on businesses in an interconnected, globalized world: It substantially increased the profits of German car makers while at the same time it is expected to lure away corporate investment from other countries. Countries in the EU are working towards their own tax reforms (e.g. France, United Kingdom), in order to increase the competitiveness of local firms. However, decreases in government income from taxation will lead to a decrease in the provision of public services such as education and health, impacting in this way the development and prosperity of human capital. In reality, in today’s globalized interconnected world, firms often trade, operate and sell across borders. Therefore, the level of economic activity of a firm in a particular country is determined by tax policies in all countries where it has affiliates. As a consequence, these policies affect the prosperity of societies in many countries.
Despite such effects and the wide-spread cross-border operations of firms, the lack of appropriate data has so far precluded a knowledge-based understanding of the international repercussions of corporate tax policies. Through TAXGLOBAL, I will provide a comprehensive analysis of the cross-border effect of firm taxation on economic activity. Given that tax reform is high on the agenda, such insights are now needed more than ever. Moreover, while the EU aims at ensuring a smooth functioning of the common market by harmonizing product and labour market regulation, corporate tax policy remains under the sovereignty of its member states which use it to compete for multinational firms’ operations. Against this background, it is essential to fully understand and quantify the cross-border impact of corporate tax policy in order to enhance job creation, sustainable investment and productivity growth in a globalized economy. TAXGLOBAL will provide a new understanding of the issue by compiling unique high-quality data from Norway and analysing it in a quasi-experimental research design. In particular, TAXGLOBAL will contribute by (i) merging several administrative data sets on the domestic and foreign operations of companies which are obtained directly from the administrative and statistical authorities to which they re-port. This new and unique database will provide an unprecedented opportunity to study in detail the cross-border links on the level of the individual firm; (ii) compiling a comprehensive and complementary database of all corporate tax reforms in a broad selection of countries to which firms are exposed via foreign affiliates; (iii) combining the information and analysing it using state-of-the-art regression models. This integral study of cross-border tax effects using administrative data for multinational firms is a completely novel approach and will advance the research field with new insights into the global effect of tax policy on real business activity, as well as provide policy makers with a novel understanding of the implications of their decisions in integrated economies such as the EU.
Despite such effects and the wide-spread cross-border operations of firms, the lack of appropriate data has so far precluded a knowledge-based understanding of the international repercussions of corporate tax policies. Through TAXGLOBAL, I will provide a comprehensive analysis of the cross-border effect of firm taxation on economic activity. Given that tax reform is high on the agenda, such insights are now needed more than ever. Moreover, while the EU aims at ensuring a smooth functioning of the common market by harmonizing product and labour market regulation, corporate tax policy remains under the sovereignty of its member states which use it to compete for multinational firms’ operations. Against this background, it is essential to fully understand and quantify the cross-border impact of corporate tax policy in order to enhance job creation, sustainable investment and productivity growth in a globalized economy. TAXGLOBAL will provide a new understanding of the issue by compiling unique high-quality data from Norway and analysing it in a quasi-experimental research design. In particular, TAXGLOBAL will contribute by (i) merging several administrative data sets on the domestic and foreign operations of companies which are obtained directly from the administrative and statistical authorities to which they re-port. This new and unique database will provide an unprecedented opportunity to study in detail the cross-border links on the level of the individual firm; (ii) compiling a comprehensive and complementary database of all corporate tax reforms in a broad selection of countries to which firms are exposed via foreign affiliates; (iii) combining the information and analysing it using state-of-the-art regression models. This integral study of cross-border tax effects using administrative data for multinational firms is a completely novel approach and will advance the research field with new insights into the global effect of tax policy on real business activity, as well as provide policy makers with a novel understanding of the implications of their decisions in integrated economies such as the EU.
The following results have been achieved by the work performed so far:
(a) Several large administrative datasets on foreign direct investments of Norwegian firms have been merged with data on individual tax returns of employees working in these firms as well as with accounting information on these firms.
(b) A comprehensive and complementary database of corporate tax legislation in 46 countries to which Norwegian firms are exposed via foreign affiliates has been compiled.
(c) State-of-the art regression models, including stacked event study designs, have been run to analyze the effect of foreign tax reforms on domestic corporate activity with a specific focus on wages.
(d) The researcher was integrated into the Department of Business and Management Science and the Norwegian Centre for Taxation where he gained important research and management skills through frequent interaction with colleagues. In addition, he participated in several targeted courses on teaching, research management and grant writing
(e) The knowledge gained from TAXGLOBAL has been shared with a broad audience, including academics, policy makers, practitioners, and civil society. This was done through personal networking, participation in international conferences and workshops upon invitation and the organization of a high-level academic conference.
(a) Several large administrative datasets on foreign direct investments of Norwegian firms have been merged with data on individual tax returns of employees working in these firms as well as with accounting information on these firms.
(b) A comprehensive and complementary database of corporate tax legislation in 46 countries to which Norwegian firms are exposed via foreign affiliates has been compiled.
(c) State-of-the art regression models, including stacked event study designs, have been run to analyze the effect of foreign tax reforms on domestic corporate activity with a specific focus on wages.
(d) The researcher was integrated into the Department of Business and Management Science and the Norwegian Centre for Taxation where he gained important research and management skills through frequent interaction with colleagues. In addition, he participated in several targeted courses on teaching, research management and grant writing
(e) The knowledge gained from TAXGLOBAL has been shared with a broad audience, including academics, policy makers, practitioners, and civil society. This was done through personal networking, participation in international conferences and workshops upon invitation and the organization of a high-level academic conference.
TAXGLOBAL finds that domestically-owned Norwegian firms see domestic salaries increase by 2.4% after a large foreign corporate tax reform. In contrast, there is no significant effect of foreign tax cuts on domestic wages of employees in foreign-owned firms. This asymmetry is consistent with most of the after-tax profits of the affected foreign subsidiary going to the global parent firm abroad rather than the immediate Norwegian parent firm, preventing Norwegian employees in these firms to capture significant rents from foreign tax cuts. In a more general panel design, TAXGLOBAL finds that a one percent increase in the net-of-foreign corporate tax rate raises wages by 0.22 percent. Using a theoretical model, if all profits are repatriated, this translates to an average incidence 0.18 per dollar, or in other words, approximately 18% of the foreign tax burden is borne by workers.
These results are novel as they are the first to provide insights into spillover effects of foreign tax reforms. TAXGLOBAL contributes to the state-of-the art econometric research in corporate taxation by focusing on the spillover effects of foreign tax reforms, which readily allows me to construct clear treatment-comparison groups by exploiting variation in where corporate subsidiaries are located and when countries change tax rates. There is no reason, a priori, that the incidence effects of foreign and domestic tax reforms need be the same: information about the reforms and repatriation decisions of firms may make the domestic wage incidence significantly different. Moreover, our incidence estimates relate to recent work on commodity taxes showing that tax changes in one product market can have incidence effects on the prices of other related products and to work on income taxes showing that marginal tax rate changes for one income group can affect the wages of workers in other sectors and income groups.
These results are novel as they are the first to provide insights into spillover effects of foreign tax reforms. TAXGLOBAL contributes to the state-of-the art econometric research in corporate taxation by focusing on the spillover effects of foreign tax reforms, which readily allows me to construct clear treatment-comparison groups by exploiting variation in where corporate subsidiaries are located and when countries change tax rates. There is no reason, a priori, that the incidence effects of foreign and domestic tax reforms need be the same: information about the reforms and repatriation decisions of firms may make the domestic wage incidence significantly different. Moreover, our incidence estimates relate to recent work on commodity taxes showing that tax changes in one product market can have incidence effects on the prices of other related products and to work on income taxes showing that marginal tax rate changes for one income group can affect the wages of workers in other sectors and income groups.