Corporate Tax Policy and International Firm Behavior

Abstract

This dissertation consists of four self-contained essays and contributes to a better understanding of the corporate tax policies of countries operating under very different conditions to generate tax revenue, taking into account the behavioral responses of firms to tax incentives in an international context. Moreover, it also provides novel evidence as to how multinational enterprises' international investment decisions are made and how the latter are crucially affected by profit-shifting opportunities and facilitated access to financial capital. To learn about these topics, it is of great relevance to rely on a broad data basis. An integral part of this dissertation is a self-collected dataset on statutory and effective corporate tax measures around the world. This dataset is unique in its comprehensiveness, containing data on corporate tax regimes of 193 countries for the time period from 1996 to 2016. Complemented by further data sources, this dataset is used in all four research papers, which are briefly summarized in the following. The first paper provides an extensive survey on the self-collected dataset and presents two concise empirical applications for which the dataset can be used: one at the firm level, where we model a firm's fixed assets as a function of the tax measures in our data, and one at the country level, where we estimate whether tax-avoidance behavior implies an inverse-U-shaped Laffer-Curve relationship between statutory tax incentives and corporate tax revenue. The second research paper builds on the latter empirical application in the previous chapter. It examines how countries generate corporate tax revenue in an international context and extends the Laffer-Curve framework by additionally taking into account the impact of foreign countries' tax-setting behavior on (domestic) tax revenue. The third study first presents a theoretical model to analyze how the threat of tax evasion affects a revenue-maximizing country's optimal tax-setting behavior. We evaluate our theoretical findings and their policy implications using our comprehensive dataset on corporate tax rates, complemented by data on tax revenues, the number of Double Taxation Treaties concluded by a country, and a wide range of additional country-level data. Finally, in the fourth research paper, where we use a rich micro dataset of German firms, we exploit our self-collected tax data to show that it is mainly due to reasons related to tax-planning opportunities and an improved access to financial capital that we observe a positive relationship between foreign and home investment of multinational enterprises.