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Relationship between capital tax rate and tax quota in Europe.

JEL E00 macroeconomic theory * E62 fiscal policy * Public finance

The relationship between tax rate and tax revenue is the research subject of many papers, such as publications by J. Wanniski (1978), J. M. Buchanan, S. B. Lee (1982), M. J. Bosk in (1988), Y. Hsing (1996), C. A. Clausing (2007), A. M. Brill, K. A Hassett (2007), Kubatova, kihova (2009), M. Trabandt, H. Uhlig (2011,2012), G. F. de Cordoba, J. L. Torres (2012).

The study by Clausing (2007) is focused on research of the simple regression equation which is applied to the data by 29 OECD countries for the period 19792002. The relationship between tax income and rate is extended by other factors, which (according to economic assumptions), also influence tax revenues. Tax revenue is defined as a tax quota (nominal tax revenue from corporate taxes divided by nominal gross domestic product) where tax quota is estimated from panel data of tax rate, squares of tax rates, corporate sector size and corporate profitability. Tax rate which maximizes tax quota level is about 33 %. A further important conclusion of the study is that the smaller (and more open) economies have "optimal" rates lower than the large (and more closed) states. Brill and Hassett (2007) used a similar methodology. Specifically, they divided panel data of OECD countries for the period 1981-2005 into 55-year periods. Moreover, their model included a variable delay. Their main contribution to the Laffer curve theory is confirmation that the tax rate maximizing relative tax revenue (tax quota) is diminishing over time. Moreover, it was demonstrated that the Laffer curve becomes steeper. A study mitten by Kubatova and Rihova (2009) also deals with the Laffer curve. They estimated regression models which include panel data of ten members of OECD for the period 1980-2006. Their econometric analysis proved that there exist significant exogenous variables that explain the endogenous corporate tax quota better than corporate tax rates. These identified significant variables are corporate sector size, profit potential, tax evasions and position within the economic cycle. Trabandt and Uhlig (2012) chose a different (more theoretical) approach. They modeled data of 15 countries (U.S. and EU-14) for creating their own model based on the assumptions of monopolistic competition. They defined the level differences between actual corporate tax rates and estimated tax rates which maximize tax revenue for each economy which was included within their research.

Regression analysis is applied to cross-sectional data for 21 European economies (20 selected countries and the average of Eurozone), for which data are available. For this purpose, the data are related to two chosen years 2006 and 2009. These years were selected due to elimination of the business cycle influence. Macroeconomic performance of the Eurozone was relatively high in 2006 (average GDP growth of the EU was 3.3 %), while 2009 represents a period of recession (average GDP growth rate of the EU was -4.3 (Y0). We use a linear regression model because a linear relationship fits the data.

The relatively high coefficients of determination for both 2006 (0.42) and 2009 (0.66) are statistically significant at very low p-values (p-----0.001). All the coefficients are statistically significant at the significance level of less than 0.05. Residuals are normally distributed. Autocorrelation and heteroskedasticity was not proved at the significant level 0.05

The results of both models are similar to each other. In 2006 the growth of implicit tax rates on capital by one percentage point increases the tax quota by 0.08 percentage points and in 2009 by 0.20 ceteris paribus. Positive linear dependence leads to the conclusion that in both cases, according to the Laffer curve theory, the Laffer point lies to the right of the implicit rates of the selected economies. That means that an increase in the implicit tax rate on capital causes relative capital tax revenues to increase in both cases.

However, the interpretation of regression results is strongly limited because of many factors. Although basic statistical tests make the defined model acceptable, it is clear that the results are strongly distorted by the lack of observations. In addition, this approach does not consider further determinants that significantly affect tax revenues (cf. Kubatova, Rihova, 2009). In addition, a tax quota does not filter tax revenues from the business cycle position sufficiently.

Published online: 23 December 2013

[c] International Atlantic Economic Society 2013

S. Burian (*) J. Break

Faculty of Economics and Management. Department of Economic Theories, Czech University of Life Sciences, Prague, Czech Republic


J. Break

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Title Annotation:RESEARCH NOTE
Comment:Relationship between capital tax rate and tax quota in Europe.(RESEARCH NOTE)
Author:Burian, Stanislav; Brcak, Josef
Publication:International Advances in Economic Research
Article Type:Report
Geographic Code:4E
Date:May 1, 2014
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