Assessing Corporate Tax Reform: Incomplete Information and Conflicting Interests
in J. Verschuuren (ed.), The Impact of Legislation: A Critical Analysis of Ex Ante Evaluation, Leiden-Boston: Brill 2009, p. 229-251
23 Pages Posted: 8 Dec 2015 Last revised: 20 Mar 2016
Date Written: March 13, 2013
Using the 2007 corporate tax reform in the Netherlands as an example, we describe the process of corporation tax law-making as a typical insiders’ debate. But even among insiders, there are differences in how ‘inside’ they really are. On the one hand, there is no independent information to test the revenue impact of a tax reform. The only source of information is the Ministry of Finance, which has considerable freedom to push its favorite reform ideas with the help of budgetary arguments. On the other hand, business representatives, both of SMEs and of large corporations, have to operate in a context of sectoral interests, which are strongly accentuated by specific tax base broadening proposals.
An explicit ex ante evaluation would have helped to develop a realistic idea of feasible goals. What can be achieved with a corporate tax rate reduction? And what, if this reduction is largely paid for by the taxpayers themselves? Is it more foreign investors, more jobs? Or rather, a temporary advantage in tying ‘paper profits’ to the Netherlands?
Another role of ex ante evaluation could have been to improve the level of information available in the legislative process. When taxpayers claim that some special tax incentive is needed, or that a proposed base broadening has a negative impact on investment decisions, how can they be made to substantiate those claims? As firms have different interests with respect to any specific package of rate reductions and base-broadening measures, the requirement that a tax reform be revenue-neutral is not just a way of protecting the average taxpayer’s interest. It is also a way to promote disclosure of information and to facilitate negotiations.
Keywords: corporation income taxation, regulatory impact assessment, ex ante evaluation, legislative process, tax policy, tax reform, tax planning; tax competition, tax co-ordination, foreign direct investment, R&D incentives, information asymmetry, paper profits, revenue neutrality
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