Do Corporate Tax Cuts Increase Investments?

Laura Brandstetter

Free University of Berlin (FUB)

Martin Jacob

WHU - Otto Beisheim School of Management

July 1, 2014

FAccT Center Working Paper Nr. 14/2013

This paper studies the effect of corporate taxes on investment. Corporate taxes are considerable costs to investments that vary across corporations. For example, since firms with a foreign parent have more cross-country profit shifting opportunities than domestically owned firms, their effective tax rate and consequently their tax-induced costs to investment are lower. Thus, we expect that investment responses to a corporate tax cut are heterogeneous across firms. Using firm-level data on German corporations, we exploit the 2008 tax reform that cut corporate taxes by 10 percentage points as an exogenous policy shock. We show in a matching difference-in-differences setting that domestically owned firms increased investments more than foreign-owned firms. Our results imply that corporate tax changes can increase corporate investment but have heterogeneous investment responses across firms.

Number of Pages in PDF File: 36

Keywords: Corporate taxation, Investment

JEL Classification: G31, H24, H25

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Date posted: December 3, 2013 ; Last revised: July 1, 2014

Suggested Citation

Brandstetter, Laura and Jacob, Martin, Do Corporate Tax Cuts Increase Investments? (July 1, 2014). FAccT Center Working Paper Nr. 14/2013. Available at SSRN: http://ssrn.com/abstract=2362258 or http://dx.doi.org/10.2139/ssrn.2362258

Contact Information

Laura Brandstetter
Free University of Berlin (FUB) ( email )
Garystr. 21
Berlin, Berlin 14195
HOME PAGE: http://www.fu-berlin.de/steuern
Martin Jacob (Contact Author)
WHU - Otto Beisheim School of Management ( email )
Burgplatz 2
D-56179 Vallendar, 56179
HOME PAGE: http://www.whu.edu/steuer
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