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Do corporate tax cuts increase investments?

  • This paper studies the effect of corporate taxes on investment. Since firms with a foreign parent have more cross-country profit shifting opportunities than domestically owned firms do, their effective tax rate and, consequently, their tax-induced costs to investment are lower. We therefore expect capital investment responses to a corporate tax cut to be heterogeneous across firms. Using firm-level data on German corporations, we exploit the 2008 tax reform, which substantially cut corporate taxes as an exogenous policy shock and expect domestically owned firms' investments to be more responsive to the reform. We show exactly this in a difference-in-differences setting. We find that the reduction in corporate tax payments led to a one-to-one increase in the real investments of domestic firms. The effect is stronger for domestic firms relying more on internal funds. Correspondingly, labor investment increased more for domestic firms, ensuring a constant mix of input factors. In addition, we show that domestic firms' sales grew faster after the tax cut than the sales of foreign-owned firms. Our results imply that corporate tax changes can increase corporate investment but that domestic firms benefit more than foreign-owned firms from a tax cut through higher investment responses resulting in greater sales growth.

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Metadaten
Author:Laura Dobbins, Martin Jacob
URN:urn:nbn:de:hbz:992-opus4-6641
DOI:https://doi.org/10.2139/ssrn.2362258
Series (Serial Number):FAccT Center Working Paper Series (14/2013)
Publisher:WHU - Otto Beisheim School of Management
Place of publication:Vallendar
Document Type:Working Paper
Language:English
Date of Publication (online):2018/06/11
Date of first Publication:2013/12/03
Release Date:2018/06/11
Tag:Kapitalanlage; Körperschaftssteuer
Corporate taxation; Investment
Edition:April 20, 2016
Page Number:52
Institutes:WHU Centers / WHU Financial Accounting & Tax Center (FAccT Center)
JEL-Classification:G Financial Economics / G3 Corporate Finance and Governance / G31 Capital Budgeting; Fixed Investment and Inventory Studies
H Public Economics / H2 Taxation, Subsidies, and Revenue / H24 Personal Income and Other Nonbusiness Taxes and Subsidies
H Public Economics / H2 Taxation, Subsidies, and Revenue / H25 Business Taxes and Subsidies
Licence (German):Copyright for this publication