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We analyse a puzzle in the UK corporation tax: by both historic and international standards corporation tax revenues have been high while the statutory rate has been low. Possible explanations include the following: changes in tax law that may have increased effective tax rates; other factors such as higher profitability or different macro-economic conditions may have led to higher effective tax rates; and finally the size of the corporate sector may have increased. We find evidence for all three explanations, although none would be sufficient in itself. To the extent that higher profits, particularly financial sector profits may have led to high revenues, there are doubts as to whether revenues will continue to be so strong.

Traditional analysis of the taxation of income from capital has focused on the impact of tax on marginal investment decisions; the principal impact of tax on investment is through the cost of capital, and is generally measured by an effective marginal tax rate. In this paper, we consider cases in which investors face a choice between two or more mutually exclusive projects, both of which are expected to earn at least the minimum required rate of return. Examples include the location decisions of multinationals, firms' choice of technology, and the choice of investment projects in the presence of binding financial constraints. In these cases the choice depends on the effective average tax rate. We propose a measure of this rate and demonstrate its relationship to the conventional effective marginal tax rate. Estimates of both are presented and compared for domestic and international investment in Germany, Japan, the UK and USA between 1979 and 1997.

This paper investigates a set of strategic decisions facing US firms. We develop a simple theoretical framework in which firms choose whether or not to serve a foreign market, and if so whether by exporting, or by becoming a multinational. The model is applied to a sample of US firms choosing whether and how to supply the European market. We take Europe to be a single market and allow the firms to choose to produce in one of the UK, France and Germany. In the empirical application we find that the average effective tax rate plays an important role in the choice of location. Our central estimate is that, conditional on the firm having decided to locate production in Europe, a one percentage point increase in the average effective tax rate in the UK would lead to a one percentage point reduction in the probability of locating in the UK. The equivalent figure for Germany is around three-quarters of a percentage point, and for France around one-third of a percentage point. This suggests that tax is a quantitatively significant factor in location decisions. However, in general, the evidence suggests that taxation is not a significant factor in the decision of whether to locate in Europe - either as opposed to exporting to Europe or not serving the European market at all. Other factors predicted by the theory also play a significant role. Most striking are the agglomeration benefits of being located close to other firms within the industry which undertake R&D.; These agglomeration benefits affect both the decision as to whether to locate abroad and, conditional on that decision, where to locate. Also, firms with high plant level fixed costs are less likely to produce abroad.

We use panel data for 1,218 UK industrial and commercial companies between 1970 and 1990 to investigate whether dividends are affected by taxes. Cross-section variation in the tax cost of paying dividends results from surplus advance corporation tax (ACT) affecting some firms during this period. Observations on firms moving into and out of surplus ACT allow us to identify the effect of taxes whilst controlling for unobserved firm-specific influences. Our results suggest that the tax cost has a statistically significant and quantitatively important influence on dividends.

This paper contrasts Samuelson's (1964) definition of "true economic depreciation" with the use of this term that has become standard in the more recent literature on neutral business taxes. Samuelson defined "economic depreciation" to be the change in the economic value of an asset, whilst the more recent literature is concerned with change in the replacement cost value of an asset. Economic values can be higher than replacement cost values where the owner of an asset can use it to earn monopoly profits or economic rents. We show that the properties of certain taxes on income from capital depend crucially on which definition of "true economic depreciation" is permitted as a deduction. In particular, Samuelson's comprehensive income tax has the property of invariant valuation - i.e. the economic value of an asset is the same for taxpayers subject to different tax rates - only when the depreciation deduction is the change in economic value, and not when this is the change in the replacement cost value. A class of business taxes are shown to be neutral - i.e equivalent to lump sum taxes - when either of these depreciation deductions are permitted. However, at the same statutory tax rate, the depreciation deduction based on the change in replacement cost values is shown to raise substantially more revenue for the government.