While the statutory corporate income tax rate in the EU fell by 9% between 2014 and 2022, the effective tax rate of affiliates of multinational enterprises dropped by 14%. We argue that corporate tax policy making has shifted away from the 'cut rate - broaden base' approach. Building a novel database of tax reforms in the EU, we document the growing trend of adopting tax base narrowing measures. We find indication that tax-base narrowing reforms had a negative impact on ETRs of affiliates of MNEs which was only to a small extend compensated by base-broadening reforms. Taken together, tax base reforms account for 36% of the reduction in ETRs, compared to 9% attributable to changes in statutory rates. Finally, we explore the political determinants of adopting tax reforms and find no significant differences between right-wing, center, and left-wing governments. This suggests that common trends shape corporate tax policies in the EU.

This paper analyzes the macroeconomic impact of corporate taxation. The analysis is conducted in a quantitative two-country model. In the first step, the paper describes the long-run effects of corporate taxation. A reduction in the corporate-income tax rate increases GDP, wages, consumption, investment, and business density. The trade balance is at the same time negatively affected. Firms headquartered in a country which lowers its corporate tax become internationally less active and instead focus more on their domestic market. In the second step, the paper presents adjustment dynamics that are induced by a corporate-tax reform. The dynamic response of the economy can substantially differ when comparing shorter and longer time horizons. The third step of the paper investigates the effects of international profit shifting in high-tax and low-tax jurisdictions.

The effective taxation of corporate profits is at the centre of an active public and academic debate. This debate often focuses on the extent of low-taxed profit of multinational enterprises (MNE) in jurisdictions with low statutory tax rates or average effective tax rates (ETRs). However, some affiliates in high tax jurisdictions may also be subject to low ETRs, due to tax incentives or other provisions. To date, a global accounting of the ETRs paid by MNEs that incorporates within-country heterogeneity has been missing. Using a new dataset on the global activities of large MNEs, this paper provides new estimates of the distribution of ETRs of large MNEs across and within jurisdictions. Our results show that low tax profit is common, and that more than half of low-taxed profit sit in high tax jurisdictions.

This paper explores the role played by preferential tax treatments as a channel explaining why MNEs have a lower effective tax rate than their domestic counterparts. Using a quasi-experimental design and panel data from 2011 to 2018, I estimate how a temporary decision by the EU General Court to annul the European Commission's decision of unlawful state aid of the Spanish scheme of amortisation of financial goodwill, affected effective tax rates of firms in Spain. This tax scheme allows companies taxable in Spain to deduct from their taxable income the financial goodwill deriving from the acquisition of a foreign company. I find a decline in the tax burden of MNEs when this specific Spanish scheme is allowed to be re-implemented. Domestic firms do not appear to benefit from this policy change suggesting that this measure is selective in nature and confer a preferential tax treatment to MNEs.

This paper investigates the interplay between tax expenditures (TEs) and social policy. Leveraging the Global Tax Expenditures Database, we carry out the first data-driven cross-country assessment of direct spending and TEs for social welfare to shed light on this often-overlooked aspect of fiscal policy. Our research reveals prevalent TE usage for social purposes and substantial costs in terms of revenue forgone, averaging over 1 percent of GDP and 6 percent of tax revenue. Our analysis showcases varying strategies employed by countries, emphasizing the reliance of high-income economies on TEs granted through personal income taxes, and low/middle-income countries predominantly using value-added tax-related TEs for social objectives. Some functions contribute significantly to social spending through TEs, e.g. housing shows a tax expenditure/direct spending ratio reaching roughly 365 percent in the US and 203 percent in France.

We link taxation to income inequality by focusing on twelve (12) African countries from 2005 to 2021. Analysis is based on two datasets drawn from the World Income Inequality Database, and the African Tax Administration Forum. We employ the random between-within effects model, and cluster at the level of a country’s income group—low, lower-middle, or upper-middle income country. We document that within-country income inequality declines as shares [in gross domestic product] of income taxes, international trade taxes, resource taxes, and taxes on capital gains increase. As income taxes rose, individuals from poorer countries gained more pre-tax incomes compared to their counterparts from richer countries. As resource or capital gains taxes rose, individuals from poorer countries gained more pre-tax incomes compared to their counterparts from richer countries. We conclude that income taxes as well as taxes on natural resources extraction, international trade, and capital gains, significantly reduce income inequality.

We analyze the effect of government size on social welfare and GDP per capita growth for the sample of 36 OECD countries in the last six decades. These effects are negative but smaller in absolute terms for welfare than for GDP per capita. This result is robust to changes in the estimation method, the use of smoothed variables, the inclusion of dummy variables that control for expansions and recessions, and additional control variables, such as the composition of expenditures and taxes, and public debt. More importantly, we find that the effect of government size follows an inverted U-shape: positive and greater on social welfare than for GDP per capita growth when government size is below 35% to 40%, and negative beyond that threshold. Interestingly, the range of values for which government size positively affects growth and welfare expands significantly with government quality, productive spending, and low levels of debt.

This paper analyzes the relation between economic growth, inequality and redistribution. In a cross-country setting for 25 EU countries over the period between 2007 and 2019, we show that market-income inequality is related to higher growth in the short term. To estimate the impact of redistribution to low-income earners, we introduce a new measure, the so called net benefit share (NBS). Contrary to other findings, we show that this (targeted) redistribution to low-income earners (Q1 NBS) fosters growth in the short term, driven by the consumption and private investment channel. On the other hand, untargeted redistribution towards higher-income earners reduces growth.

We provide a new rationalization of why social security may improve welfare. We consider a setting where the introduction of funded social security cannot improve welfare for a fully rational agent. We introduce error-prone individuals who make stochastic savings decisions according to the consistent-mistakes model. The expected utility of error-prone agents is lower than rational decision-makers even if, on average, they save the same. Furthermore, error-prone individuals save less for retirement in a multi-period setting than their rational counterparts. Social security limits the scope of mistakes agents make in their savings decisions and may generate substantial welfare gains.

We investigate the design of optimal transfer policies in developing countries, characterized by substantial inter-regional economic disparities, information asymmetry between central and sub-national governments, and externalities arising from public goods. To address these challenges, we construct a principal-agent model that incorporates asymmetric information between the two tiers of government and considers externalities. Local regions are different in income levels, preference for public goods, or both. We conduct numerical simulations based on the county-level fiscal data of China during 2016-2019. Our finding reveals that the optimal marginal transfer curves under both uni-dimensional and bi-dimensional heterogeneities scenarios are considerably lower than the prevailing one. The optimal transfer undertakes the function of the Pigouvian tax to correct externalities. Moreover, transitioning from the current transfer system to the optimal one yields a substantial welfare improvement, equalling a per capita consumption increase ranging from 3.02% to 4.11%

This paper analyzes the interactions between redistribution and unemployment insurance policies and their implications for the optimal design of tax-benefit systems. In a setting where individuals with different earnings abilities are exposed to unemployment risk on the labor market, I characterize the optimal income tax schedule and the optimal unemployment benefit schedule in terms of empirically estimable sufficient statistics. I provide a Pareto-efficiency condition for tax-benefit systems that implies a tight link between optimal redistribution and optimal unemployment insurance: the steeper the profile of income taxes is, the flatter the profile of unemployment benefits should be, and vice versa. Optimal replacement rates are therefore monotonically decreasing with earnings, from 1 at the bottom of the earnings distribution to 0 at the top, and redistribution through unemployment benefits is efficient. Empirical applications show that these interactions between redistribution and unemployment insurance have important quantitative implications.

We build a model in which home owners decide when to switch to carbon-neutral heating and investments in energy efficiency. Agents differ with regard to abatement costs, home ownership, labor productivity and time they are alive. The investment model is nested in an overlapping generations Mirrlesian optimal taxation model. We develop a compensation mechanism which guarantees a Pareto-improvement consisting of five key components: (1) carbon pricing, (2) a category-based transfer based on building characteristics exactly compensating carbon prices, (3) uniform ad-valorem subsidies on investments and operational costs associated with decarbonizing a building, (4) public debt to finance the ad-valorem subsidies and (5) income tax adjustments based on climate mitigation benefits to service debt. We show that exact compensation only depends on the interest rate, fossil fuel price path and ambition of climate policy.

The uptick in energy prices has sparked concerns about the equity of the distribution of energy expenditures across households.

We employ data from the European Household Budget Survey for 19 European countries and the years 2010, 2015, and 2020 to gauge the level of inequality through concentration indices of energy expenditures and Kakwani indices. In 2020, the proportion of equivalent disposable income allocated to energy expenses for the lowest income quintile ranges from 7.5% in Luxembourg to 30.1% in Croatia. All countries analysed exhibit regressive energy expenditures.

Significant variations exist in the degree of regressivity. Luxembourg stands out with the highest regressivity at -0.26, while Bulgaria features the least regressivity with a value of -0.07. We also analyze the distinct impact of various socio-demographic factors on energy expenditure inequality. Taking Germany as an example, our findings reveal that the household type, accounts for nearly 63% of the concentration index.

The factors determining the allocation of renewable energy facilities and their effects are questions of growing interest. Using data on all wind farms and solar farms installed in Spain and electoral results at the municipal level from 1991 to 2019, we conduct a diffin-diff event-study to determine the effect of siting these facilities on different electoral outcomes. Our findings reveal that siting a wind farm results in an electoral loss of 2.2 percentage points for the party incumbent at the regional level, while the local incumbent faces no significant punishment. However, when we perform heterogeneity estimation based on political alignment, the electoral loss increases to 4.8% for the party holding office at the regional level on those municipalities in which both layers of government are aligned, while the local incumbent in aligned municipalities experience a 2.2% loss of their vote-share.

This paper investigates how commercial trucks respond to differences in environmental taxes on diesel fuel across European borders. First, we analyze truck flows at German borders using administrative toll data to understand how truck traffic reacts to changes in environmental taxes. Second, we examine individual truck journeys across Europe from their start-to-end-points using administrative survey data to assess whether trucks drive detours to avoid high environmental taxes. We find that an increase in a country’s tax rate decreases truck traffic to and from that country. However, this increase in taxes also heightens the probability of trucks taking detours to circumvent higher environmental taxes on fuel. We further investigate the environmental impacts of such tax-induced responses. We use air pollution data to determine whether local pollution increases due to tax-induced increases in cross-border truck flows. In addition, we relate the estimated excess kilometers driven to emissions to measure the environmental externalities.

This study presents preliminary evidence that the European Emission Trading Scheme (EU ETS) is exploited by multinational companies to artificially shift profits between European countries. Specifically, using the EU transaction log and Orbis ownership data, I highlight abnormally high levels of internal trade in emission allowances at year-end—despite the April surrender deadline -- within firms under the same Global Ultimate Owner (GUO). This activity is especially marked in transactions involving firms without actual emission certificate needs. Towards the year-end, allowances are moved from subsidiaries in strict accounting jurisdictions to those in lenient ones, indicating regulatory arbitrage. These patterns hint to a potential misuse of the EU ETS for financial manipulation rather than emission reduction. I hope to add further analysis, in particular related to the market price of allowances, to contribute to ensuring the EU ETS remains an effective tool for environmental objectives without facilitating unintended financial exploitation.

This paper studies the economic and environmental effects of a landmark piece of environmental legislation: the Clean Air Act. We improve the understanding of the effects of this important environmental regulation in three ways. First, we use modern event-study techniques and confidential data from the US Census Bureau to estimate the long-run impacts of the regulation on plant output, employment, and fuel use. Second, we identify two forms of spillover effects: (a) regional spillovers to unregulated areas and (b) within-firm spillovers to unregulated plants in regulated firms. We find both larger long-run effects on the economic activity of regulated plants as well as meaningful spillovers effects both within firms and across locations. Our third contribution is to combine these new results with an industry equilibrium model that captures both within-firm and cross-location spillovers of the regulation.

Digital economy firms are often accused of avoiding profit taxes on a large scale, prompting numerous countries to impose digital service taxes on these firms to indirectly tax their profits. We study the incidence of digital service taxes using data on Amazon’s fee structure and pricing. We find that Amazon increased its fees by almost the exact amount of the digital service tax. Firms using Amazon as a platform have largely been able to pass these increased costs onto consumers. On average, the incidence of digital service taxes falls almost entirely on consumers, though there is significant heterogeneity among countries.

This paper presents simulations of the tax revenue arising from the Pillar One Amount A proposal of the G20/OECD. Amount A aims at revising taxing rights on multinational enterprises with at least EUR 20 billion in revenue and with profitability above 10%. In a first step, we identify the MNEs that would be covered by Amount A. Then, we approximate the destination-based revenues of MNEs in different jurisdictions, to determine reallocated profits. In a final step, we account for double taxation relief to obtain the net revenue from Amount A. We find that the total amount of additional tax revenue arising from Amount A is around EUR15.6 billion. The extent of taxing rights redistribution induced by Amount A is affected by (a) the inclusion criteria of covered MNEs; (b) the reallocation parameter of 25 percent.

In 2021, the OECD announced that over 130 jurisdictions supported its “Pillar 2” proposal for a 15 percent global minimum effective tax rate for large multinational enterprises. This proposal has since been adopted unanimously by the European Union, and has come into force on 1 January 2024. We employ an event study methodology using daily 2021 stock market returns of 3.275 European firms to determine how Pillar 2 announcements affected the value of firms subject to the global minimum tax, and that of their competitors. While we find no significant impact on the stock market returns of directly affected firms, we do find a positive effect on the returns of their competitors. Our results suggest that the introduction of a global minimum tax for large multinational enterprises can be beneficial for their competitors, shedding light on the role of a minimum tax on inter-firm competition and the level playing field.

This paper examines the most direct method to curb European profit shifting: an EU-wide adoption of unitary taxation. Using country-by-country reporting data, we estimate country-level revenue changes when taxable profits are distributed based on different formulas measuring economic activity. We find that tax revenues would increase for most EU members. While some countries – in particular the Netherlands, Luxembourg, Ireland, and Malta – may incur losses, these can be offset by adopting an effective national top-up tax, consistent with the EU's plan to introduce a minimum corporate tax of 15%. Our findings indicate that unitary taxation would not only restore fair competition and significantly boost EU-wide tax revenues—ranging from US$ 24.1 to US$ 26.8 billion in isolation or US$ 34.5 to US$ 35.4 billion when combined with the minimum tax—but is also politically feasible: When coupled with the minimum corporate tax, no member state would lose from its implementation.

India's tax revenue performance remains sub-optimal despite several tax reforms initiated by the government. One aspect of low tax compliance that policymakers in India have overlooked is the taxpayers’ moral sentiments towards tax payment, which is captured through the tax morale concept. Tax morale helps in explaining why taxpayers voluntarily pay taxes even when standard deterrent factors such as audits or penalties are absent. Therefore, understanding the factors influencing tax morale can help implement appropriate policies to improve tax revenue productivity by better understanding tax compliance behaviour. In this context, this paper aims to examine the factors determining tax morale in India using an independent survey. The results reveal that tax morale in India is shaped by age, participation in groups or associations, employment and income status, level of financial satisfaction, tax burden, trust in government, national pride, efficiency of public spending, and level of corruption.

This study investigates how the two main types of risk-based audits (face-to-face examinations and audits conducted by mail) impact future taxpayer reporting behavior using a large and unique data base that includes granular tax return information as well as risk indicators used for audit selection on audit and comparison samples of self-employed US taxpayers. We employ difference-in-differences estimation with entropy balancing to assess effects on the distribution of reported taxes, as well as mean dollar and percentage changes. We find that face-to-face audits are consistently effective in improving post-audit compliance. However, the impact of audits conducted by mail (correspondence audits) is more nuanced and depends on the timing of the audit. This pattern persists even after controlling for key differences in tax issues subject to examination at different points in the audit cycle, suggesting a need for further investigation into the optimal balance between face-to-face and correspondence audits.