Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Bergen, Department of Economics

No 5/18: PROFIT SHIFTING AND CORRUPTION

Katarzyna Habu () and André Seidel ()
Additional contact information
Katarzyna Habu: NBER and Oxford University Centre for Business Taxation, Saïd Business School and and Department of Economics, Oxford University
André Seidel: University of Bergen, Department of Economics, Postal: Institutt for økonomi, Universitetet i Bergen, Postboks 7802, 5020 Bergen, Norway

Abstract: This paper introduces heterogeneous profit shifting costs induced by corrupt tax officials to the analysis of profit shifting of multinationals. Using a theoretically derived corruption weighted tax differential, we show that corruption increases profit shifting of European firms. We use our estimates to calculate the implied tax revenue elasticities for European countries and find that countries with otherwise similar tax rates face lower tax revenue elasticities when they are more corrupt. This means that corruption negatively affects the revenue gains that countries could have from increasing their tax rates.

Keywords: corruption; profit shifting; tax revenue elasticities

JEL-codes: D73; H25; H26

46 pages, First version: August 19, 2016. Revised: May 23, 2018.

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