Working Paper: CEPR ID: DP13143
Authors: Peter Egger; Nora Strecker; Benedikt Zoller-Rydzek
Abstract: The effective corporate profit tax rates (ETRs) of multinational enterprises (MNEs) differ from those of national enterprises (NEs). In this paper, we argue that the bargaining power of MNEs is an important factor in explaining these differences beyond profit shifting. First, larger and more profitable firms are more valuable for various reasons (in terms of absolute tax revenues, employment, etc.) for tax authorities. Thus, in threatening to move their operations to other jurisdictions, larger firms may be able to extract greater deductions. This potential bargaining advantage of larger firms may result in a regressive ETR schedule. As MNEs tend to be larger and more profitable than NEs, they may pay lower ETRs for merely size-related reasons. Second, MNEs face arguably lower costs to relocate their business (or profits) to foreign countries with a lower tax rate than NEs. This enhances their bargaining position even further when negotiating tax deductions. To quantify the importance of bargaining in the tax gap between MNEs and NEs, it is elemental to rigorously condition on the determinants of MNE status, profit taxation, as well as possible profit-shifting activities. To that end, we use French firm-level data and entropy balancing of the joint determinants of MNE status (including the possibility of profit shifting) and a firm's ETR. Empirically, we find that the empirical regressivity of the French tax schedule reduces French MNEs' ETRs by 2.52 percentage points on average due to their larger size, while the relocation threat of the same firms reduces their ETR by 3.58 percentage points relative to comparable NEs. The former is a tax advantage that any firm (MNE or NE) of the same size could obtain, while the latter is specific to MNEs and beyond the reach of NEs.
Keywords: Profit Taxation; Multinational Firms; Entropy Balancing
JEL Codes: H25; H26; F23; C21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| MNE status (F29) | ETRs (R49) |
| Size (L25) | ETRs (R49) |
| Relocation threat from MNEs (F23) | ETRs (R49) |
| Larger and more profitable firms (L25) | Better tax deductions (H20) |