Profit Taxation and the Elasticity of the Corporate Income Tax Base: Evidence from German Corporate Tax Return Data

Abstract

This paper estimates the elasticity of corporate taxable income with respect to the average corporate tax rate. To control for the endogeneity of the tax rate, we use an instrumental variable approach, calculating the counterfactual average tax rate that a corporation would have faced in a particular period had there been no endogenous change in corporate profits. This counterfactual rate is derived from a microsimulation model based on tax return data. A statistically significant and relatively large point estimate of the tax base elasticity implies that a reduction in the statutory corporate tax rate would reduce corporate tax receipts less than proportionally.

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