Taxes on profit create high social costs, according to Saïd Business School, University of Oxford

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New research from the Oxford University Centre for Business Taxation at Saïd Business School, titled 'The Social Costs of Taxing Profit', estimates that for every £100 of corporation tax collected by HMRC, there is a cost to society as high as £29.

The relatively high social costs of corporation tax that we estimate should inform policy making, as the economic implication of corporation tax goes well beyond tax revenue

New research from the Oxford University Centre for Business Taxation estimates that for every £100 of corporation tax collected by HMRC, there is a cost to society as high as £29.

The paper titled, ‘The Social Costs of Taxing Profit’ was written by Professor Michael Devereux, Director of the Oxford University Centre for Business Taxation and Senior Research Fellow Li Liu, Saïd Business School, Oxford.

The costs include both the direct costs of complying with the tax law, and indirect costs arising from the ways in which taxes distort economic behaviour. For example, taxes on profit induce businesses to reduce their investment and employment – the foregone benefits of such reduced activity is an additional cost to society.

The tax revenue itself is not a social cost: it represents a transfer from the taxpayer to the government – leaving the taxpayer worse off, but allowing additional expenditure on publicly-provided goods and services. But the additional 29% is an estimate of a pure waste to society of complying with the tax, with no offsetting benefit.

The research is based on a detailed analysis of around 8 million confidential UK corporation tax records in the UK made available by HMRC for research purposes between 2001 and 2008. The approach used for measuring the social cost of taxes is based on estimating the elasticity of taxable income – the extent to which the income of companies responds to differences in the tax rate.

Senior Research Fellow Li Liu, Saïd Business School, Oxford said, ‘Corporations can modify their behaviour in response to tax in a number of different ways. They can change the scale of production and hence the demand for labour, capital and other factors; they can adjust the choice of financial policy and locate both real activities and profits elsewhere. It would be extremely difficult to try to estimate all of these responses, and to aggregate them into a single measure of the social cost. This research breaks new ground by estimating the elasticity of taxable profit, which incorporates all margins of response to changes in the tax rate and so makes possible the estimation of social costs. The relatively high social costs of corporation tax that we estimate should inform policy making as the economic implication of corporation tax goes well beyond tax revenue'.

A short policy paper describing the research is available at: http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Docs/Publications/Policy_Papers/how-large-is-the-cost-of-taxing-profit-pp.pdf

To see a copy of the full report or to speak with Li Liu, please contact:

Jonaid Jilani, Press Officer, Saïd Business School
Mobile: +44 (0)7860 259996; Tel: +44 (0)1865 614678,
Email: jonaid(dot)jilani(at)sbs(dot)ox(dot)ac(dot)uk or pressoffice(at)sbs(dot)ox(dot)ac(dot)uk

Kate Richards, PR Coordinator Saïd Business School
Mobile: +44 (0)7711000521; Tel: +44 (0)1865 288879
Email: Kate(dot)richards(at)sbs(dot)ox(dot)ac(dot)uk or pressoffice(at)sbs(dot)ox(dot)ac(dot)uk

Notes to editors

1. About Li Liu

Li Liu is a Research Fellow at the Oxford University Centre for Business Taxation. Her research focuses on public economics, in particular corporate taxation and finance. Her current research addresses the economic and welfare implication of corporation taxes on business behaviour including small business incorporation and investment, international taxation and UK multinational investment, and the overall social costs of corporation tax.

2. About Michael Devereux

Michael Devereux is Director of the Oxford University Centre for Business Taxation, Professor of Business Taxation at Saïd Business School, and a Professorial Fellow at Oriel College. Mike’s work concerns the impact of taxes on business behaviour, including investment, employment, location and financial behaviour, as well as the design of appropriate tax policies for business. A particular interest is the international side of corporation tax, including where companies do and should pay tax on profit, how differences in taxes affect real economic decisions such as where companies locate different economic activities, and how this affects the process of competition between countries.

3. About Saïd Business School

Saïd Business School at the University of Oxford blends the best of new and old. We are a vibrant and innovative business school, but yet deeply embedded in an 800 year old world-class university. We create programmes and ideas that have global impact. We educate people for successful business careers, and as a community seek to tackle world-scale problems. We deliver cutting-edge programmes and ground-breaking research that transform individuals, organisations, business practice, and society. We seek to be a world-class business school community, embedded in a world-class University, tackling world-scale problems.

In the Financial Times European Business School ranking (Dec 2014) Saïd is ranked 10th. It is ranked 14th worldwide in the FT’s combined ranking of Executive Education programmes (May 2014) and 22nd in the world in the FT ranking of MBA programmes (Jan 2015). The MBA is ranked 7th in Businessweek’s full time MBA ranking outside the USA (Nov 2014) and is ranked 5th among the top non-US Business Schools by Forbes magazine (Sep 2013). The Executive MBA is ranked 21st worldwide in the FT’s ranking of EMBAs (Oct 2014). The Oxford MSc in Financial Economics is ranked 7th in the world in the FT ranking of Masters in Finance programmes (Jun 2014). In the UK university league tables it is ranked first of all UK universities for undergraduate business and management in The Guardian (Jun 2014) and has ranked first in ten of the last eleven years in The Times (Sept 2014). For more information, see http://www.sbs.ox.ac.uk/

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