The Role of the Corporate Income Tax as an Automatic Stabilizer

24 Pages Posted: 8 Dec 2009

See all articles by Thiess Buettner

Thiess Buettner

Ifo Institute for Economic Research; CESifo (Center for Economic Studies and Ifo Institute); Ludwig-Maximilians University of Munich

Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich; Ludwig-Maximilians-University, Munich; Center for Economic Studies (CES)

Date Written: September 2009

Abstract

This paper analyses the effectiveness of the corporate income tax as an automatic stabilizer. It employs a unique firm-level dataset of German manufacturers combining financial statements with firm-specific information about credit market restrictions. The results show that approximately 20 per cent of all firms report both positive taxable income and capital market restrictions. Taking account of the income tax rates and the size differences of the firms, we find that demand stabilization through the corporate income tax amounts to about 8 per cent of an initial shock to gross revenues. This stabilization effect varies over the business cycle and tends to increase during cyclical downturns.

Keywords: corporate income tax, stabilization, capital market restrictions, loss offset, firm-level data

JEL Classification: H25, H32, E63

Suggested Citation

Buettner, Thiess and Fuest, Clemens, The Role of the Corporate Income Tax as an Automatic Stabilizer (September 2009). CESifo Working Paper Series No. 2798. Available at SSRN: https://ssrn.com/abstract=1481140

Thiess Buettner (Contact Author)

Ifo Institute for Economic Research ( email )

Poschingerstr. 5
Munich
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Ludwig-Maximilians University of Munich

Geschwister-Scholl-Platz 1
Munich, Bavaria 80539
Germany

Clemens Fuest

ifo Institute – Leibniz Institute for Economic Research at the University of Munich

Poschinger Str. 5
Munich, DE 81679
Germany
++89-9224-1430 (Phone)

Ludwig-Maximilians-University, Munich ( email )

Schackstrasse 4 / II
Munich, DE 80539
Germany

Center for Economic Studies (CES) ( email )

Schackstr. 4
Munich, DE 80539
Germany
++89 2180-2748 (Phone)
++89 2180-17845 (Fax)

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