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Research Grants

Project of the German Research Foundation (DFG)

Project Title: Taxation and Firm Productivity, part of the research group "Understanding the Behaviour of Multinational Corporations in the Context of International Tax Institutions"

Funding: since 2019

Project Details:

The evolution of firm productivity is one of the most decisive factors that determine long-run economic growth rates. While firm productivity has developed quite differently across Europe, these differences have largely been ignored in the literature so far. It is thus an important open question how government policy, and especially tax policy, can affect productivity growth. In this research project, we will dig deeper into the role of tax policy in explaining and fostering productivity growth. We will study three interrelated research questions. First, we will provide a simple model of heterogeneous firms which clarifies potential productivity channels and then test the relationship between productivity and taxation empirically. We will hereby explore all determinants of forward-looking effective tax rates, which also include anti-profit-shifting measures (e.g., thin-capitalisation rules, earning stripping rules). More explicitly, we will exploit major tax reforms to analyse changes in the productivity distribution. One specific goal will be to better understand whether these potential differences relate to changes in tax policy or to changes in firm characteristics such as size or international activity of multinational corporations.Second, we examine the impact of the international tax system (worldwide vs. territorial tax system) on measured firm productivity. To answer this empirically, we can exploit a recent policy reform from 2009 when the United Kingdom abolished the taxation of profits earned abroad and introduced a territorial tax system. We can thus apply a simple difference-in-differences research design, comparing affiliates of UK multinationals with affiliates of multinational firms headquartered in other countries. If affiliates of UK multinationals are active in a country with a lower tax rate than the UK, we expect that profit shifting to these subsidiaries is increased due to the reform. In addition, comparing the profit-shifting results with specifications where we use total factor productivity as the dependent variable will allow us to separate the effects that the system switch had on profit shifting and on real investment and productivity growth.Finally, we examine the role of research and development activities, itself driven by tax incentives, in explaining firm productivity. We will develop a theoretical model with endogenous firm productivity to study the effects of tax incentives related to R&D activities. Our basic model will already provide us some insight into whether and how tax-planning options and R&D activities reinforce each other. In a last step, the model we be extended by introducing i) stochastic R&D, ii) the existence of tangible assets, and iii) oligopolistic market structures. Thus, the aim of the last work package is to produce a number of new predictions about the interaction of firm heterogeneity, the size and the location of (in)tangible assets and tax-planning incentives.

See the offical Project Description of the DFG

Research Fellowship of the German Research Foundation (DFG)

Project Title: Tax Havens: Small States with Great Influence on Economic Policy

Funding: 1 September 2014 - 30 June 2015

Project Details:

Tax havens are small (only 1.2% of the world's population lives in them), but economically very important: Individuals hold about US-$ 6 trillion in tax havens. Firms also use tax havens extensively. The British Virgin Islands, with a population of only 31,000, are the 5th biggest destination for foreign direct investment in the world. It is a highly relevant topic how other states should respond to tax havens. Many governments are highly indebted in the aftermath of the financial and Euro crises and therefore less tolerant towards very low tax payments by some firms and individuals. Moreover, tax havens feature not only low tax rates, but also low levels of regulation. Therefore, also the current debate about the regulation of the financial sector has to take offshore financial centers into account. This research project analyzing the effects of tax havens on other states' tax and regulation policy considers three core areas: Tax evasion by individuals, new measures against corporate profit shifting, and the interaction of low tax rates and low regulation levels of banks. In each part, the focus in on the empirical analysis, but the econometric estimations will be based on theoretical models.

See the official Project Description of the DFG