The impact of capital tax reforms on firm start-ups, emigration and the flow of savings

The impact of reforms on firm start-ups

• The authors find that the PFU, IFI and IS reforms, taken separately, have statistically significant positive effects on the firm start-up rate in the sectors most heavily affected. For each one-point reduction in the tax rate, the PFU reform leads to a 1.25-point increase in the firm start-up rate between 2016 and 2022, the IS reform to a 1.0-point increase, and the IFI reform to a 0.3-point increase.
• The three reforms are strongly correlated, and these effects, when measured separately, cannot simply be added together. A joint estimation of the effects of the PFU and corporation tax reforms suggests that a one-point reduction in the profit tax rate leads to a one-point increase in the business start-up rate. If these effects are weighted by the employment generated by the newly created firms, the effect is smaller, at 0.05 percentage points, but still significant.

The impact of the reforms on emigration

• The results suggest that the reforms had a statistically significant downward impact on departures and an upward impact on returns, particularly in the case of the IFI reform.
• These estimates nevertheless reveal that the effect of a reduction in tax rates is very small in absolute terms. The emigration rate is initially low (0.2 per cent), and the effects of the reforms are also very small in magnitude: a one-point reduction in the corporation tax rate results in a 0.02-point reduction in the emigration rate, or 0.008 points for the IFI reform.

The impact of expatriations on firms

• The authors find significant effects on the firm following the departure of a key shareholder: the balance sheet total falls by 15 per cent, turnover also falls by 15 per cent, the wage bill falls by 25 per cent and value added by 20 per cent.
• The aggregate effect of key shareholders leaving the country remains, however, small. With an exit rate of around 0.2 per cent, the effects on the loss of value added account for only 0.04 per cent of the value added produced by firms controlled by individuals.
• If we take the estimates of the reforms’ impact on reducing departures and the scale of these effects, we find that the tax reforms have a positive impact on the productive fabric of around 0.01 per cent, representing an aggregate effect whose magnitude remains very small.

The impact of the reforms on reinvestment behaviour

• The analyses carried out generally tend to confirm that the primary purpose of households’ income from movable capital is not to provide funding for new investments.
• Capital gains realised through a ‘contribution-disposal’ transaction are an exception. In this specific context, the authors observe a sharp increase in the probability of becoming a shareholder in a start-up firm in the years following the realisation of the capital gain. This tax mechanism, the use of which rose sharply in 2018, requires the capital gain realised to be reinvested in companies via a holding company in order to benefit from a tax deferral, a pattern which the authors do indeed observe in the data.