The effects of business taxation on economic and social welfare: new insights from tax return data

Despite attempting to reduce a very large budget deficit by cutting public expenditure and raising other taxes, the UK government intends to cut the main rate of corporation tax - levied on corporate profit - from 28% to 21% over the life of this Parliament. It is doing so as part of its aim to "create the most competitive corporate tax regime in the G20" (Cabinet Office, 2010, p10). The government believes that the corporation tax has an important impact on economic activity. At the same time, there has been a public outcry over multinational companies that are alleged to have avoided paying UK corporation tax. This research proposes to estimate the scale of the effects of taxes on business behaviour, including avoidance, and also the consequent costs to society of the distortions to behaviour induced by taxes. The majority of the work will focus on corporation tax, but we will also analyse personal taxes on the profits of unincorporated businesses, and VAT. A key feature of the research will be the use of confidential tax return data, recently made available by HMRC in a secure Datalab. The availability of these data provides an unprecedented opportunity for major breakthroughs in our understanding of the effects of taxes on key aspects of business behaviour. In collaboration with HMRC, we have already matched data from the population of corporation tax returns over a 10 year period with data from published financial accounts for the same companies. We will also match the tax return data for unincorporated businesses, and VAT returns for all registered businesses. The information in the resulting matched dataset will be at the frontier of what is available anywhere in the world for empirical research on the effects of business taxation. The proposed research will generate important new insights into the effects of business taxation on economic and social welfare. We will focus on four specific areas of business behaviour: investment, source of finance, choice of legal form (primarily whether to incorporate or not), and tax avoidance. We will also analyse the responsiveness of taxable income to the tax rate; this reflects all behavioural responses, and can be used to estimate the overall costs to society of distortions to business behaviour. We will use statistical techniques to exploit two forms of variation in UK business taxes. First, we will exploit discontinuities in marginal or average tax rates at several kink points in tax schedules, including the asymmetric treatment of profits and losses. Second, we will exploit the many important reforms that have taken place in each of the taxes considered over the last decade. Thanks in part to previous ESRC investments, the research team at the Oxford University Centre for Business Taxation is in an outstanding position to conduct innovative research exploiting these data resources. The PI directed the pilot project of the HMRC Datalab which pioneered the use of anonymised corporation tax return data in empirical research on UK companies, and other members of the research team now have experience of working with these data. Ultimately, the results of this research should be informative in the design of business taxes, though aspects of the results should also be useful in setting the forms of administration of each tax. The results should therefore be useful to HM Treasury and HMRC, and also to their counterparts around the world. Recently the general public has been more engaged with business tax than ever before, mainly through extensive press coverage of alleged tax avoidance. We aim to use our research to broaden the public debate on the nature and design of taxes on business.