Applied Micro Seminar : Every Tuesday
Time: 12:15 pm – 13:30 pm
Date: December, 9th
Room : 3001

Théo VALENTIN “Non-linear Corporate Income Tax: Learning, Intensive and Extensive Margins “

Abstract :

The welfare implications of corporate tax reforms are made unclear by the variety of effects they generate. This paper estimates firms’ responses to corporate income tax (CIT) reforms in terms of intensive margin and extensive margin responses while disentangling the effect of frictions, especially inattetion. I study a reform in France that replaced the existing flat corporate income tax with a threshold-based two-rates progressive system. I rely on detailed administrative tax data and exploit a unique institutional feature, the reported tax amount. First, I infer that at most 19% of firms are inattentive to tax reforms, i.e. they use the pre-reform tax code instead of the current one. This implies a cost of inattention of 1.8% of their taxable income. Second, I exploit the excess mass at the threshold to estimate the elasticity and show that overall frictions attenuate it by 39% in the short-run. Third, I find a sizable positive business creation effect of the reform. Using a two-way fixed effects PPML event-study design combined with treatment intensity variation at the county level, I estimate an average treatment effect of 15%. However, unincorporated businesses reacted to the lower average corporate tax rate by incorporating and by splitting revenues across multiple entities. This creates a pure tax revenue loss. Although this response is highly sensitive, its magnitude remains limited. Overall, inattention is the largest friction in the short-run and the welfare gains from the corporate tax are mostly driven by business entry.

Organizers:
Benoît SCHMUTZ (Pôle économie du CREST)
Clément MALGOUYRES (Pôle économie du CREST)

Sponsors:
CREST