Profit-Shifting Elasticities, Channels, and the Role of Tax Havens: Evidence from Micro-Level Data

Abstract

This chapter reviews the literature providing empirical estimates on the tax elasticity of multinational profits and discusses the challenges faced when attempting to quantify tax-motivated profit shifting. We first use micro-level data to show that multinational corporations hold a disproportionately large share of profits and financial assets in tax havens, relative to real activities in these countries. We then argue that tax notches associated with anti-tax avoidance legislation may be exploited to better understand tax-motivated profit shifting. This approach suggests a semi-tax elasticity of pre-tax profits of about 0.22, which is substantially smaller than estimates provided in earlier studies.

Keywords: corporate income taxes, profit shifting, tax havens, multinational corporations

JEL Classification: H250, H260