Do Corporate Tax Cuts Increase Investments?
Free University of Berlin (FUB)
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
Date posted: December 3, 2013 ; Last revised: July 1, 2014
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