Real Effects of Corporate Taxation: A Review

Abstract

In this study, I review the empirical literature on the real effects of corporate taxation. I define real effects broadly as firms’ investment responses, corporate risk taking, capital structure choices, and aggregate outcomes such as GDP growth. I base my analysis on 79 empirical studies on the investment effects of corporate taxation and contrast these results to theoretical predictions. Consistent with theory, there seems to be a consensus that higher corporate tax rates reduce corporate investment, foreign direct investment (FDI), aggregate growth, and innovation. Similarly, many papers examine bonus depreciation, which consistently increases investment. At the same time, there is little evidence on the employment effects of corporate taxes and on the role of several tax base elements in shaping investments. Importantly, the role of tax avoidance (opportunities) in the tax effect on investment has received very little attention from the empirical literature over the past two decades. I also derive several other potential avenues for future research.

Keywords: Corporate taxation, literature review, real effects, investments, employment, tax avoidance

JEL Classification: M48, M41, H25, H26