CORTAX (short for CORporate TAXation) is a Computable General Equilibrium (CGE) model designed to evaluate the macro-economic effects of unilateral and multilateral corporate tax reforms. It includes the 27 countries of the European Union, plus the UK, the US, Japan and a fictional tax haven country.
JRC has been using CORTAX in order to support important European Commission tax initiatives, including proposals for a common consolidated corporate tax base, taxation of the digital economy, the debt-equity bias, and the Communication on Business Taxation for the 21st Century.
CORTAX incorporates many key features of the existing corporate tax regimes, including multinational profit shifting, investment decisions (cost of capital), loss compensation, and the debt-equity choice of firms. These features enable the JRC to investigate a wide range of corporate income tax (CIT) reforms, such as tax base harmonization, changes of the corporate tax rate and the removal of CIT incentives for debt financing of investment decisions. Moreover, the model allows examining the effects of multinational tax base consolidation, which inter alia addresses some of the issues concerning base erosion and profit shifting (BEPS).
Given the choices companies face when confronted with CIT reforms, it is important to assess the effects of these reform under a general framework. CORTAX captures the interactions between the different economic agents and by considering the dynamic behavioural responses of firms (including multinational enterprises or MNEs) and households, it provides a more realistic assessment of tax policy changes.
In this context, a key feature of the model is the breakdown of firms into three categories: domestic firms, MNEs’ headquarters and MNEs’ foreign subsidiaries. Crucially, MNEs and domestic firms differ to the extent that the former optimise profits globally and engage in profit shifting activities across borders.
For an accurate representation of real economic activity, CORTAX has been calibrated with the data from established sources including Eurostat, the OECD, UN, ZEW Mannheim, and company-level information from the Bureau van Dijk Orbis database, with additional parameter valued sourced from the economics literature. The modelling and calibration of CIT-related compliance costs enables the JRC to simulate also the effects of tax code simplification.
The CORTAX model has acquired a strong reputation among corporate tax experts. The model was originally produced by CPB Netherlands, and has since been used by experts affiliated to the Oxford University for Business Taxation, the Erasmus University Rotterdam, the Tinbergen Institute and CESifo.
Model documentation
Selected research publications include
- The economic consequences of corporate tax rates reductions in the EU: Evidence using a computable general equilibrium model
- Corporate tax harmonization in the EU
- Corporate Tax Policy and Unemployment in Europe: An Applied General Equilibrium Analysis
- Modelling corporate tax reform in the EU: New calibration and simulations with the CORTAX model
- How large is the corporate tax base erosion and profit shifting? A general equilibrium approach
Team
