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«Der Open-Access-Publikationsserver der ZBW – Leibniz-Informationszentrum Wirtschaft The Open Access Publication Server of the ZBW – Leibniz ...»

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Der Open-Access-Publikationsserver der ZBW – Leibniz-Informationszentrum Wirtschaft

The Open Access Publication Server of the ZBW – Leibniz Information Centre for Economics

Elschner, Christina; Lammersen, Lothar; Overesch, Michael; Schwager, Robert

Working Paper

The Effective Tax Burden of Companies and on

Highly Skilled Manpower: Tax Policy Strategies in a

Globalized Economy

ZEW Discussion Papers, No. 05-31

Provided in cooperation with:

Zentrum für Europäische Wirtschaftsforschung (ZEW) Suggested citation: Elschner, Christina; Lammersen, Lothar; Overesch, Michael; Schwager,

Robert (2005) : The Effective Tax Burden of Companies and on Highly Skilled Manpower:

Tax Policy Strategies in a Globalized Economy, ZEW Discussion Papers, No. 05-31, http:// hdl.handle.net/10419/24122

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zbw Leibniz-Informationszentrum Wirtschaft Leibniz Information Centre for Economics Discussion Paper No. 05-31 The Effective Tax Burden of Companies

and on Highly Skilled Manpower:

Tax Policy Strategies in a Globalized Economy Christina Elschner, Lothar Lammersen, Michael Overesch and Robert Schwager Discussion Paper No. 05-31 The Effective Tax Burden of Companies

and on Highly Skilled Manpower:

Tax Policy Strategies in a Globalized Economy Christina Elschner, Lothar Lammersen, Michael Overesch and Robert Schwager

Download this ZEW Discussion Paper from our ftp server:

ftp://ftp.zew.de/pub/zew-docs/dp/dp0531.pdf Die Discussion Papers dienen einer möglichst schnellen Verbreitung von neueren Forschungsarbeiten des ZEW. Die Beiträge liegen in alleiniger Verantwortung der Autoren und stellen nicht notwendigerweise die Meinung des ZEW dar.

Discussion Papers are intended to make results of ZEW research promptly available to other economists in order to encourage discussion and suggestions for revisions. The authors are solely responsible for the contents which do not necessarily represent the opinion of the ZEW.

Non-Technical Summary Companies pay taxes on profits and capital. Also, under competitive markets for highly skilled labour, firms have to compensate employees for international differences in labour tax burdens. Both elements thus constitute a tax burden on companies and influence the attractiveness of a particular region as a location for investment. The present paper combines the two indicators so as to allow for a comprehensive picture of the level of taxation relevant for companies at various locations. The synthesis offered here permits a deeper understanding of the challenges faced by tax policy in various countries, of the strategies chosen to address them, and of the political institutions and economic circumstances determining these choices.

For this purpose, we present and compare estimates of the effective level of taxation in 33 selected locations across Europe and the United States. For each country, there is both a measure of the effective tax burden on profits and capital and a measure for the effective tax burden on highly skilled manpower. The computations of effective tax burdens on capital investment are based on the model developed by Devereux and Griffith. For the determination of effective tax burdens on highly qualified manpower we developed a simulation model that accounts for several components of the remuneration package, the family status, and varying points in time of taxation.

By combining the two indicators we find that there is great dispersion in the effective tax rates of both factors of production. Swiss regions show low tax burdens for both indicators.

East European and Scandinavian regions display low effective tax rates on capital investment but moderate or high effective tax rates on highly qualified manpower. France, Germany, and Italy tax companies and highly qualified employees at a high level. The United States display moderate tax rates on highly qualified labour and high tax rates on capital investment.

We identify three potential causes in order to explain the different tax policy strategies of different countries: (1) political institutions, (2) preferences for redistribution and equality, and (3) the position in globalisation and growth. The first two categories mainly concern the income tax revenue and the tax burden on individuals; the latter category rather concerns the tax burden on the mobile factor capital investments. Our findings on the effective tax rate of companies and highly skilled manpower strongly reflect these different tax strategies. However, each country shows a mix of tax strategies which lead to the country-specific tax burdens. Small countries, high growth rates, and federal structure with high tax autonomy stand for countries that offer lower tax burdens, especially on companies. As examples for this group of countries we can identify e. g. Ireland and Switzerland, however, each with certain limitations. Most new EU member states follow a strategy of taxing companies comparatively low, but offer only an average tax climate for highly skilled employees. Large countries, representative democracies with coalitions, and a high preference for redistribution are likely to induce higher tax burdens on both highly qualified employees and companies and thus are less attractive locations for an investment from a tax perspective. As typical examples for this group of countries, we identify Germany, France, and Italy. The low tax rates for the highly skilled in the United States therefore stand for her plurality system, her federal structure, and a population with low preference for redistribution. Due to her size the United States do not need to tax companies at low rates.





The Effective Tax Burden of Companies and on Highly Skilled Manpower:

Tax Policy Strategies in a Globalized Economy Christina Elschner*, Lothar Lammersen*, Michael Overesch*, Robert Schwager**

–  –  –

JEL: H21, H24, H25, Keywords: effective tax burden, tax policy, company taxation, personal income tax

Abstract

Company taxes and taxes on highly skilled labour both influence the attractiveness of a particular region as a location for investment. We measure the effective tax burden on capital investment and on highly qualified labour in 33 locations across Europe and the United States. We then correlate both types of tax burden in order to study the different tax policy strategies applied in different countries. We identify three causes for different strategies: political institutions, preferences for redistribution and equality, and the position in globalisation and growth. Small countries, high growth rates, and federal structure with high tax autonomy stand for countries with lower tax burdens, especially on companies.

Large countries, representative democracies with coalitions, and a high preference for redistribution are likely to induce higher tax burdens.

* Centre for European Economic Research (ZEW) and University of Mannheim ** Georg-August-University of Göttingen and Centre for European Economic Research (ZEW) 1 Introduction Companies pay taxes on profits and capital. Also, under competitive markets for highly skilled labour, firms have to compensate employees for international differences in labour tax burdens. Both elements thus constitute a tax burden on companies and influence the attractiveness of a particular region as a location for investment. While there exist numerous studies on the tax burden on capital investment on the one hand (see for example, Devereux et al., 2000, 2001 and European Commission 2002) and several studies on labour taxation on the other hand (OECD, 2002 or Sutherland, 2001) there is no study covering and combining both aspects of tax burden. The present paper aims at filling this gap so as to allow for a comprehensive picture of the level of taxation relevant for companies at various locations. The synthesis offered here permits a deeper understanding of the challenges faced by tax policy in various countries, of the strategies chosen to address them, and of the political institutions and economic circumstances determining these choices.

For this purpose, we present and compare estimates of the effective level of taxation in several European countries and the United States.1 For each country, there is both a measure of the effective tax burden on profits and capital and a measure for the effective tax burden on highly skilled manpower. Although both indicators rely on different models for estimating effective tax burdens, both models share the same spirit. Therefore, we can compare the qualitative results of both parts, and we can draw common conclusions.

Due to the great number of relevant tax rules, effective tax burdens may differ significantly from statutory tax burdens. Our analysis contributes to theoretical research on taxation by providing meaningful quantitative estimates of effective tax burdens. These estimates take into account the most important rules of all the relevant taxes. For company taxation, we include the corporation tax with surcharges, other profit related taxes, real estate taxes, and specific taxes based on capital. For the taxation of highly skilled manpower, we consider income taxes including surcharges, tax-like social security contributions as well as wage taxes paid by the company.

In order to quantify and compare effective company tax burdens, we calculate effective average tax rates (EATRs), which are relevant for international location decisions,2 and effective marginal tax rates (EMTRs), which are important indicators for a firm’s investment opportunities and competitiveness from a tax perspective at a given location. The computations are based on the model developed by Devereux and Griffith,3 which builds on and extends the approach by King and Fullerton (1984, pp. 7-30). Both concepts have already been used for a number of international tax burden comparisons.4 The estimations were prepared for the «IBC BAK International Benchmark Club»®, which evaluates and compares economic performance and location factors across European regions. The headline figures represent the IBC Taxation Index (see Table 2 and Table 3). The purpose of the IBC being the benchmarking of location factors on a regional basis, the project produces effective tax rates for companies in 161 regions in the 18 countries studied. In the present paper, we restrict attention to the national level by presenting only the median value for the included countries. Additionally, we present regional results for Switzerland, where the inter-regional variation is most pronounced, and the minimum and maximum corporate tax burden of the included regions in Germany and France. Detailed results can be found in Lammersen and Schwager (2005) and Elschner and Schwager (2005).

See Richter et al. (1996), p. 19; Devereux and Griffith (1998); Büttner and Ruf (2004).

See Devereux and Griffith (1999); Devereux and Griffith (2003); Schreiber et al. (2002).

See, e.g., Gutekunst and Schwager (2002), European Commission (2002), Sachverständigenrat (2001) pp. 308pp. 354-360; Jacobs et al. (2004).



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