Corporate Taxation and the Welfare State

University of St. Gallen, Department of Economics, Discussion Paper No. 2008-18

CESifo Working Paper Series No. 2557

35 Pages Posted: 5 Sep 2008

See all articles by Christian Keuschnigg

Christian Keuschnigg

University of St. Gallen – Department of Economics (FGN-HSG); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Date Written: August 2008

Abstract

The paper compares the impact of corporate taxation and social insurance on foreign direct investment (FDI) and unemployment. Four main results are derived: (i) the optimal size of the welfare state depends on the degree of risk-aversion and the unemployment rate as a measure of labor income risk. The unemployment rate partly reflects the country's exposure to globalization; (ii) corporate taxation and social insurance have equivalent effects on unemployment and outbound FDI; (iii) while an increase in the corporate tax can raise corporate tax revenue, it is rather likely to worsen the government's total fiscal stance. A corporate tax cut can thus be self-financing due to fiscal increasing returns in the presence of a large public sector; (iv) a corporate tax should be used to contribute to welfare state financing only in exceptional cases when job creation is excessive and the unemployment rate is inefficiently low. These conditions are probably unlikely to hold in Europe's generous welfare states with high structural unemployment rates.

Keywords: Corporate tax, foreign direct investment, unemployment, welfare state

JEL Classification: F21, H21, H53, J64, J65

Suggested Citation

Keuschnigg, Christian, Corporate Taxation and the Welfare State (August 2008). University of St. Gallen, Department of Economics, Discussion Paper No. 2008-18; CESifo Working Paper Series No. 2557. Available at SSRN: https://ssrn.com/abstract=1263317

Christian Keuschnigg (Contact Author)

University of St. Gallen – Department of Economics (FGN-HSG) ( email )

Varnbuelstrasse 19
St. Gallen, 9000
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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