CEPR: Fiscal consequences of corporate tax avoidance

31 May 2023

Bilicka, Dubinina, Janský: Multinational corporations routinely shift their profits to tax havens globally in order to benefit from low-tax environments.

This column uses German municipal data on trade and property tax rates to study the consequences of such corporate tax avoidance on government tax revenues and tax revenue structures. It shows that increases in trade tax rates lead to lower levels of trade tax revenue in places exposed to multinationals with at least one tax haven. Furthermore, municipalities exposed to profit shifting do not compensate for lost revenue with higher property tax revenues or rates, which leaves them with lower tax revenue overall. 

The revelations from the Panama and Paradise papers in 2016 and 2017 exposed a sizeable amount of international tax avoidance by firms, and in particular, multinational corporations (MNCs). This spurred renewed interest in the literature to calculate the extent to which MNCs shift profits to tax havens and the scale of potential tax revenue losses to governments (e.g. Bilicka 2019, Davies et al. 2015, Garcia-Bernardo et al. 2022). As the evidence on the size, scope, and consequences of profit shifting by multinationals has been increasing, the global importance of the phenomenon has also been highlighted, with estimates showing that 36% of multinational profits are shifted to tax havens globally (Tørsløv et al. 2023). Although the magnitudes differ across studies, the existing literature agrees that the scale of profit shifting is large and has consequences for corporate tax revenues (Wier et al. 2018, Guvenen et al. 2022).

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