The Elasticity of Corporate Taxable Income: New Evidence from UK Tax Records

We use the population of UK corporation tax returns between 2001 and 2008 to estimate the elasticity of corporate taxable income with respect to the statutory corporation tax rate. We do so by analysing bunching in the distribution of taxable income at two kinks in the marginal rate schedule. We find a relatively small elasticity of between 0.14 and 0.18 for companies with profits around the £ 300k kink and a small marginal deadweight cost of 8% of the revenue that would have been generated by a marginal increase in tax, ignoring behavioural responses. We find a much higher elasticity of between 0.54 and 0.57 for companies around the £10k kink. By matching the corporate tax return data with accounting records and analysing joint bunching in the corporate and personal tax system, we decompose the overall elasticity of corporate taxable income into two parts: an elasticity of total income with respect to the net of tax rate of between 0.2 and 0.3, and an elasticity of the share of income taken as profit with respect to the difference between the personal and corporate tax rates of between 0.04 and 0.07. With these estimated elasticities, we find that the marginal deadweight cost of the tax around £10k is around 25% of the increase in tax revenue, absent any behavioural responses.