Essays on Corporate Taxation

Abstract

This dissertation explores corporate tax compliance and tools that can raise the state's capacity to raise corporate taxes.

In the first chapter, I use confidential corporate tax returns to study a long-standing mechanism designed to increase tax compliance in Greece: withholding corporate taxes on sales to the public sector. Using a staggered diff-in-diff design, I show that firm assets grow gradually when obtaining contracts for multiple years. Controlling for asset and employment growth, I estimate that firms on government contracts report up to 21\% higher total revenues than those who do not hold contracts by the fifth year. Withholding firms also report up to around 22 additional Euro cents of taxable profits for every Euro of revenue (taxable profit margins) by the fifth year. To show that this is largely a tax compliance response, I study tax reporting around two thresholds. First, small firms bunch on the zero taxable profit margins threshold in non-contract years, and do not bunch in contract years. Second, firms reliant on government contracts -- with higher government sales to total sales ratio -- bunch at the zero refund threshold when having taxes withheld, showing that the withholding amount is a target for tax payment. The findings stress the importance of consistent government contract access for smaller and younger firms to stimulate firm growth, and increase tax compliance.

The first chapter points to revenue collection limitations for small firms, especially in a setting absent third-party reporting and a withholding mechanism. In the second Chapter, I study a voluntary tax compliance program for small firms -- a “self-assessment” program prescribing target taxable profit margins (the ratio of taxable profits to revenues) for different types of firm activities. Firms that reported profit margins above these targets in a given year were exempt from audits in that year. I find that the firms that take up the program report significantly larger taxable profits than non-eligible firms, with some evidence for longer-lasting effects on tax reporting. Firms that take up the program for more years exhibit stronger effects. While the first chapter shows that withholding increases revenue reporting, in the second chapter I find that small firms can easily and substantially manipulate reported revenue (decreasing it by up to 40\%) to help meet prescribed profit margins without paying more in taxes. Overall, the program increased tax revenues collected from small firms, but points to a very large level of baseline under-reporting of profits and the ease of manipulating reported revenues.

The first two chapters do not delve into how firms can obtain any tax or growth benefits through political connections; the first chapter does not, for example, address whether certain firms can have advantages in obtaining government contracts due to political connections. Therefore, in the third chapter, I match corporate tax returns to firms connected to public officials or political parties, using four sources of politicians or political donations data: (1) the names of candidates in Greek elections, (2) the names of firm board members from financial statements, (3) mandated asset disclosures identifying whether a main politician owns shares in a firm, and (4) mandated donations disclosures by firms to political party. Unlike chapters one and two, where smaller firms are the least tax compliant, chapter three suggests that larger firms are more likely to be connected and, on average, may report lower taxable profits. While the evidence is only suggestive, it points to a role for political connections in obtaining tax benefits especially in the case of firms connected by donating to political parties.