Formula apportionment: Factor allocation and tax avoidance

Arbeitspapier

This paper addresses the question of how firms react to tax incentives in a formula apportionment (FA) tax regime. Under FA, profits of all consolidated entities of a business group are summed and then allocated according to a formula based on FA factors. We hypothesize that firms may change the allocation of real production factors and/or manipulate the FA factor through tax avoidance strategies. Analyzing FA tax effects of the German local business tax with payroll expense as the exclusive FA factor, we find empirical evidence consistent with both hypotheses. Regarding the allocation of production factors, we observe significant tax effects on labor input at the intensive margin but not on labor input at the extensive margin. In addition, we find evidence of an indirect FA spillover effect on capital investment. Our findings on tax avoidance proxies are consistent with tax-induced manipulations of payroll expense as FA factor in order to save tax payments.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: arqus Discussion Paper ; No. 199

Classification and Topics

• Classification: Wirtschaft ; Fiscal Policies and Behavior of Economic Agents: Firm ; State and Local Taxation, Subsidies, and Revenue ; State and Local Government; Intergovernmental Relations: Interjurisdictional Differentials and Their Effects ; Geographic Labor Mobility; Immigrant Workers
• Subject: Factor Allocation ; Formula Apportionment ; Profit Shifting ; Tax Avoidance

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Eichfelder, Sebastian ; Hechtner, Frank ; Hundsdoerfer, Jochen
• Event: Veröffentlichung
• (who): Arbeitskreis Quantitative Steuerlehre (arqus)
• (where): Berlin
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/123505
• Last update: 10.03.2025, 11:43 AM CET