Using a large panel dataset on worldwide operations of multinational firms, this paper studies one of the most advocated anti-tax-avoidance measures: Controlled Foreign Corporation rules. By including income of foreign low-tax subsidiaries in the domestic tax base, these rules create incentives to move income away from low-tax environments. Exploiting variation around the tax threshold used to identify low-tax subsidiaries, we find that multinationals redirect profits into subsidiaries just above the threshold and change incorporation patterns to place fewer subsidiaries below and more above the threshold. Roughly half of the resulting increase in global tax revenue accrues to the rule-enforcing country.

Journal of Public Economics 2019, Vol. 173, p. 44-71. 

Enforcement and the Importance of Tax Policy Design for Elasticities: Evidence from Cypriot Reforms

(with Panos Mavrokonstantis, INSEAD)

We study behavioural responses to tax enforcement and the importance of enforcement policy design for behavioural elasticities, using the context of charitable contributions in the Republic of Cyprus. We show three sets of results. First, exploiting salary-dependent thresholds governing the documentation requirements when claiming deductions for contributions, we estimate that reported donations increase by 0.7 pounds when taxpayers can claim 1 pound more without providing documentation. Second, using a reform that retroactively shifted the reporting threshold, we estimate that at least 36 percent of these observed responses are purely due to changes in reporting. Third, we estimate a tax price elasticity of reported donations of -0.5, and show that this parameter is highly sensitive to policy design features such as thresholds determining reporting standards.

(with Niels Johannesen, University of Copenhagen)

Tax Enforcement with Multiple Evasion Technologies

In standard models of tax enforcement with a single evasion technology, stricter enforcement unambiguously leads to less evasion and more revenue. We show that in the presence of multiple evasion technologies, stricter tax enforcement may lead to more tax evasion and it may be associated with a loss of government revenue and lower welfare. Intuitively, increasing the probability of detecting one of the evasion technologies, induces some firms to switch to the other evasion technology. If the latter technology is more expensive but allows for more evasion, then this behavioural effect may dominate other effects and evasion may increase while revenue drops.



© 2018 Sarah Clifford