Heterogeneous Tax Sensitivity of Firm-Level Investments

57 Pages Posted: 3 Dec 2018

See all articles by Peter H. Egger

Peter H. Egger

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment; Ludwig-Maximilians University of Munich; CESifo (Center for Economic Studies and Ifo Institute for Economic Research

Katharina Erhardt

ETH Zürich - KOF Swiss Economic Institute

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: November 2018

Abstract

This paper introduces a stylized theoretical framework to identify five different firm types depending on their financial situation and their ownership structure. Based on these firm types, the model explains the heterogeneous tax sensitivity of firm-level investments. Guided by the theoretical model, we empirically identify these partly latent firm types using a threshold estimation approach. The empirical analysis uses a large firm database for 17 countries allowing for a quantification of the regime-specific investment responses to taxation. We find important differences in the tax sensitivity of investment across firm-types for dividend as well as for corporate taxation. The impact of corporate taxation is up to 70% higher for entrepreneurial firms than for managerial firms. In contrast, dividend taxation has a comparable negative effect for cash-constrained managerial firms and entrepreneurial firms but no significant impact on their unconstrained counterparts.

Keywords: Access to capital, corporate tax, Firm Heterogeneity, Manager-shareholder conflicts, Personal taxes

JEL Classification: D22, G32, H25, L21

Suggested Citation

Egger, Peter H. and Erhardt, Katharina and Keuschnigg, Christian, Heterogeneous Tax Sensitivity of Firm-Level Investments (November 2018). CEPR Discussion Paper No. DP13341. Available at SSRN: https://ssrn.com/abstract=3294999

Peter H. Egger (Contact Author)

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment ( email )

Poschingerstr. 5
Munich, DE-81679
Germany
+49 0 89 9224 1238 (Phone)
+49 0 89 985369 (Fax)

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Ludwig-Maximilians University of Munich

Schackstr. 4
Munich, 80539
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research

Poschinger Str. 5
Munich, DE-81679
Germany

Katharina Erhardt

ETH Zürich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

Christian Keuschnigg

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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