ZEW Corporate Taxation Microsimulation Model (ZEW TaxCoMM)

Political discussion in Germany and other European countries revealed the outstanding relevance accorded to revenue and distribution effects of tax reforms in the field of corporate taxation. Both issues are taken as crucial determinants for the feasibility and sustainability of tax systems thus eclipsing systematic aspects of taxation at least partially. So far, the coverage of existing quantitative approaches on the impact of corporate taxation does not reflect this demand. Widely recognised approaches focus on the computation of effective tax burdens thus providing important insights into the incentives of taxation. Unfortunately, these models do not allow robust conclusions on revenue impacts and distributional consequences of tax reforms. In view of the scarce evidence on these issues at least at corporate level, the intention of this paper is to put forward an instrument explicitly allowing for policy analysis of corporate tax reforms. The proposed corporate microsimulation model has been developed at the Centre of European Economic Research (ZEW) in collaboration with the University of Mannheim. The idea of this paper is to employ the methodology of microsimulation for policy analyses since this methodology captures structural differences of micro units and is thus appropriate to draw conclusions on the individual financial impacts of tax reforms. The key feature of the proposed corporate microsimulation model consists in processing financial statements taken from the DAFNE data base of the Bureau van Dijk and deriving the tax base for corporate income tax and trade tax endogenously. In this context the consideration of firm specific balance-sheet data and profit and loss account data provides a linkage to the real economic sphere which is crucial to account for the real development of corporations over time, to capture changes in the legal framework adequately and later on to integrate behavioural responses to tax reforms. To simulate tax regulations according to a reference tax system or a reform proposal, the data-set is supplemented by survey data on tax accounting practices. It is shown that the distinct set-up of the proposed model can account for tax regulations in great detail. Among other elements of the corporate tax base, regulations governing depreciation, provisions, creditors and financial results for tax purposes are considered explicitly. This proceeding ensures that the endogenous tax assessment of the micro entities largely fits reality and can be seen as an indispensable precondition for profound policy analyses. In the end, the approach put forward in this paper allows revealing short-term distributional implications and revenue effects of corporate tax reforms. These applications, however, will be presented in subsequent publications as the focus of this paper is on a rather technical description.

Reister, Timo, Christoph Spengel, Katharina Nicolay and Jost Henrich Heckemeyer (2008), ZEW Corporate Taxation Microsimulation Model (ZEW TaxCoMM), ZEW Discussion Paper No. 08-117, Mannheim.