Taxes and the Global Allocation of Capital David Backus, Espen - - PowerPoint PPT Presentation

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Taxes and the Global Allocation of Capital David Backus, Espen Henriksen, and Kjetil Storesletten Carnegie-Rochester | April 20, 2007 This version: April 19, 2007 Backus, Henriksen, and Storesletten () Capital and Taxes 1 / 19 Capital and

SLIDE 1

Taxes and the Global Allocation of Capital

David Backus, Espen Henriksen, and Kjetil Storesletten Carnegie-Rochester | April 20, 2007

This version: April 19, 2007 Backus, Henriksen, and Storesletten () Capital and Taxes 1 / 19

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Capital and taxes

The Economist, February 2007 With capital mobile and economies increasingly interlinked, money will continue to move to places where costs, including taxes, are low.

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UK

Financial Times, April 2007 British-based multinationals would be allowed to repatriate billions of foreign profits tax-free under proposals being drawn up by Britain’s Treasury to improve the competitiveness of the country’s tax system. ... Business groups say the change would help the UK attract more corporate headquarters and boost investment.

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EU

Wall Street Journal, April 17, 2007 Europe’s major economies are competing with one another to cut corporate taxes as they fight to attract and keep investment, fueling a trend that has taken Europe’s corporate tax rates below those of other regions.

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France

The Economist, February 2007 Presidential candidate Segolene Royal hinted at the idea of “taxing capital more than work”.

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Lucas

“Supply-side economics,” 1990 I now believe that neither capital gains nor any of the income from capital should be taxed at all. [But my] personal experience has led me to a certain suspicion of definitive answers to tax questions.

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Our question

Can corporate taxes explain some of the cross-country differences in capital-output ratios? Answer: probably.

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Our question

Can corporate taxes explain some of the cross-country differences in capital-output ratios? Answer: probably.

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Outline

Capital and taxes in theory Evidence on capital-output ratios Evidence on corporate taxes Evidence on capital and taxes Open questions

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Theory

Premise

Markets equate after-tax marginal products of capital With CES production, mpk depends on capital-output ratio Countries with high tax rates have low capital-output ratios

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Theory

Theoretical example

One-good world, many countries i Equate marginal products of capital across countries 1 + rt−1 = 1 + (1 − τit) [f1(kit, zitnit) − δ] . With CES production function f1(kit, zitnit) = ωi(kit/yit)−1/σ ⇒ log kit/yit ≈ β0 + βt + βi + σ log(1 − τit)

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Evidence on Capital

Capital-output ratios

2 2.5 3 3.5 4 4.5 Capital−Output Ratio 1980 1985 1990 1995 2000 2005 au/pt at/se be/uk ca/us ch es fi fr ie it is jp no nl nz

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Evidence on Capital

Investment-output ratios

.15 .2 .25 .3 .35 1980 1985 1990 1995 2000 2005

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Evidence on Taxes

Corporate tax rates (statutory)

.1 .2 .3 .4 .5 .6 1980 1985 1990 1995 2000 2005

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Evidence on Taxes

Corporate tax rates (effective marginal)

.1 .2 .3 .4 .5 1980 1985 1990 1995 2000 2005

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Evidence on Taxes

Corporate tax rates (tax revenue)

5 10 15 Percent of GDP 1980 1985 1990 1995 2000 2005

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Evidence on Capital and Taxes

Capital and taxes (effective marginal tax rate)

2 2.5 3 3.5 4 4.5 Capita−Output Ratio .1 .2 .3 .4 .5 Effective Marginal Tax Rate AU AT BE CA CH DE ES FI FR IE IT JP NL NO SE

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Evidence on Capital and Taxes

Capital and taxes (business capital)

.5 1 1.5 2 2.5 Capita−Output Ratio .1 .2 .3 .4 .5 Effective Marginal Tax Rate AU AT BE CA CH DE ES FI FR IE IT JP NL NO SE

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Evidence on Capital and Taxes

Capital and taxes (corp tax revenue)

2 2.5 3 3.5 4 4.5 Capita−Output Ratio .05 .1 .15 Corporate Tax Revenue (Fraction of GDP) AU AT BE CA CH DE ES FI FR IE IT JP NL NO SE

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Evidence on Capital and Taxes

Panel data regressions

Regressions based on panel of countries Fixed country effects (may) reflect differences in production functions High tax revenue associated with low capital-output ratio Some role for revenue from wealth taxes — and maybe distributions Evidence stronger since 1990 (greater capital mobility?)

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Last thoughts

Are capital-output ratios related to corporate taxes?

◮ Yes, if we measure them with tax revenue

Open questions

◮ Why are cross-country differences in capital-output ratios so large? ◮ Is there direct evidence on pre-tax rates of return? ◮ Could impact of taxes be wildly different from our example? ⋆ International activities blur impact of local taxes ⋆ Taxes on households may play a role ⋆ Could taxes be less distortionary than we think? Backus, Henriksen, and Storesletten () Capital and Taxes 19 / 19