Tax policy and firm behaviour
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ESRC / HMRC International Conference on Tax Research and Analysis. Tax policy and firm behaviour. Research and implications. ESRC / HMRC International Conference on tax research and analysis. Contents. c urrent reforms to corporation tax and personal taxes

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Tax policy and firm behaviour

ESRC / HMRC International Conference on Tax Research and Analysis

Tax policy and firm behaviour

Research and implications


Contents

ESRC / HMRC International Conference on tax research and analysis

Contents

  • current reforms to corporation tax and personal taxes

  • research recap: business creation reduced by corporation tax and by personal taxes for people on low wages

  • research preview: high corporation tax leads to slower growth in low-productivity firms

  • research predictions on current UK reforms: a few more start-up firms, higher growth in low-productivity firms

  • questions, comments and answers

  • note: not government policy (except ‘current reforms’ slide)


Current reforms

ESRC / HMRC International Conference on tax research and analysis

Current reforms

  • corporation tax – cut from 28% to 23% by 2014

  • income tax personal allowance – increased by £1,630 by 2012

  • NICs

    • employer and employee rates increased 1% by previous Government

    • revenue returned through rise in thresholds, by this Government.

  • changes in CT reliefs

    • capital allowances rates reduced: main pool 20% to 18%

    • R&D tax credit for SMEs increased: 175% to 200% to 225%

    • Patent box: CT rate of 10% for patents

  • other changes: bank levy, changes to CFC, EIS / VCT & business rates


Research recap business creation reduced by ct by tax on low wages

ESRC / HMRC International Conference on tax research and analysis

Research recap: Business creation reduced by CT, & by tax on low wages

Source: Kneller R., and McGowan, D., ‘Tax policy and firm entry and exit dynamics: evidence from OECD countries’,

awaiting publication.


Dr kneller s research part 2 low corporation tax leads to faster growth in low productivity firms

ESRC / HMRC International Conference on tax research and analysis

Dr Kneller’s research part 2: low corporation tax leads to faster growth in low productivity firms

  • purpose – examine effect of corporation tax on productivity within an industrial sector in a country, e.g. French transport, Danish retail

  • approach – productivity measured as (roughly) ability to produce revenue after controlling for

    • asset values, and

    • number of employees

  • ‘productivity frontier’ defined as productivity level of firms that are more productive than 95% of peers

  • finding – low CT results in faster approach to productivity frontier among low productivity firms


Research predictions for uk reforms more start ups faster growth in low productivity firms

ESRC / HMRC International Conference on tax research and analysis

Research predictions for UK reforms: more start-ups; faster growth in low-productivity firms

  • corporation tax 5% cut in CT rate predicted to

    • raise rate of entry by 0.2% in profitable sectors -

    • which implies an upper bound of 3000 extra firms in equilibrium

    • result in faster convergence to frontier by low-productivity firms

  • personal tax 1% rise in employee NICs implies, overall, fewer start-ups

  • but actual results complex, due to changes in reliefs & thresholds

  • e.g. Mirrlees review’s view on how CT affects multinational decisions:


Questions comments answers

ESRC / HMRC International Conference on tax research and analysis

Questions, comments & answers

How does this research fit into our view on tax and firm behaviour?

What will the overall effect of recent reforms be?

What does this mean for policy?


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