Abstract
A corporate tax rate cut provides an incentive for corporations to shift taxable income from years before the tax rate cut to post-reform years. Our study analyzes whether depreciations and write-offs are used to achieve intertemporal income shifting. Using a panel of German manufacturing firms, we test in a difference-in-differences setting whether firms reacted to the announced 2008 corporate tax rate cut of 10 percentage points by accumulating depreciation expenses in the pre-reform year. Our results suggest that depreciation expenses in 2007 are on average about 2.5% higher than in the other observation years. Our analysis also sheds light on heterogeneity in intertemporal income shifting across firms. We provide evidence for a weaker reaction of loss firms resulting from a lower tax incentive. By contrast, we find stronger intertemporal income shifting of large firms and especially firms with a relatively high share of new investments in the capital stock. While the first result is consistent with a higher cost-efficiency of tax planning of large firms, the second finding suggests that investments in the current year provide more discretion for (tax-induced) earnings management.
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Notes
We cannot fully rule out that some of the non-corporate firms in our control group also had an incentive to shift income from 2007 to 2008. This is for two reasons. First, changes in the local business tax and the personal income tax rate on business earnings generated heterogenous tax incentives for that group of firms, which might add “white noise” to our regression results. Second, corporations may act as partners of partnerships and influence their tax avoidance strategy. However, that should only affect the policy of partnerships in case of large holdings of corporate partners. Due to data limitations, we are not able to identify the owners and parent firms of the businesses in our sample.
In 2009, the German legislator reduced the degree of book-tax conformity in the German tax code by the introduction of the so-called Balance Sheet Modernisation Act (German: Bilanzrechtsmodernisierungsgesetz).
There also existed higher local business tax multipliers for some small municipalities. For example, Dierfeld had and still has a multiplier of 9 in 2008.
Before 2008, the German local business tax payments therefore reduced the tax base of the (corporate and/or personal) income tax and its own tax base.
BTR 2008 introduced reduced personal income tax rates for nondistributed business earnings (German: Thesaurierungsbegünstigung) and capital earnings (German: Abgeltungsteuer). The details of these special tax rate regimes go beyond the scope of our analysis. The reduced personal income tax rate for nondistributed business earnings typically results in consequential tax payments in future periods and is therefore regarded as non-beneficial for most partnerships and sole proprietorships.
In a classical difference-in-difference approach, we would focus on the value of \(H_{i,t}\) in 2007. In this case, we would lose all observations of corporations without survey information in 2007.
Data source: “RDC of the Federal Statistical Office and the Statistical Offices of the Länder, AFiD panel for the manufacturing and mining industries, 1995–2008”; see also http://www.forschungsdatenzentrum.de/bestand/afid-panel_industriebetriebe/index.asp. Original titles of the detailed statistics (in German language) are: AFiD-Panel Industrieunternehmen, (information on the firm level) consisting of the Kostenstrukturerhebung im Bereich Verarbeitendes Gewerbe, Bergbau und Gewinnung von Steinen und Erden (Cost Structure Survey) and AFiD-Panel Industriebetriebe (information on the establishment level), consisting of the Jahresergebnisse des Monatsberichtes für Betriebe im Verarbeitenden Gewerbe, Bergbau und Gewinnung von Steinen und Erden (Monthly Report), and the Betriebsdatensätze der Investitionserhebung im Verarbeitenden Gewerbe, Bergbau und Gewinnung von Steinen und Erden (Investment Survey on the permanent establishment level). We hereafter refer to these surveys as AFid panel for the manufacturing and mining industries.
This amortization period is a weighted average of periods for different types of business buildings (including buildings with amortization periods of 25 years, 33 years, 40 years and 50 years). We also account for the fact that amortization periods for certain types of buildings changed over time. Eichfelder and Schneider (2014) provide a more detailed explanation.
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Acknowledgements
We thank the editor (Alfred Wagenhofer), the associate editor (Rainer Niemann), two anonymous reviewers, Martin Simmler, and the participants of the joint seminar of the tax departments of the Universität zu Köln and the Freie Universität Berlin for their helpful comments. We are also grateful for the support provided by the RDC of the Federal Statistical Office and the Statistical Offices of the Länder for the provision of the data (AFiD panel of the manufacturing and mining industries, 1995–2008) and additional statistical support. Laura Dobbins gratefully acknowledges financial support by PricewaterhouseCoopers.
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Dobbins, L., Eichfelder, S., Hechtner, F. et al. Intertemporal Income Shifting Around a Large Tax Cut: the Case of Depreciations. Schmalenbach Bus Rev 70, 313–340 (2018). https://doi.org/10.1007/s41464-018-0056-0
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DOI: https://doi.org/10.1007/s41464-018-0056-0