Corporate Tax System Complexity and Investment

55 Pages Posted: 16 Nov 2023 Last revised: 16 Apr 2024

See all articles by Harald Amberger

Harald Amberger

Vienna University of Economics and Business

John Gallemore

University of North Carolina Kenan-Flagler Business School

Jaron H. Wilde

University of Iowa - Henry B. Tippie College of Business

Date Written: February 2024

Abstract

Effective policymakers must balance the demands of formulating a corporate tax system that spurs economic activity (e.g., investment) while promoting a “level playing field” across firms. Balancing these tradeoffs has likely caused tax systems to become more complex over time, increasing firms’ difficulty in understanding and complying with tax regulations. We investigate the impact of tax system complexity on the responsiveness of firm-level investment to tax policy changes. Examining firm-level capital and labor investment and exploiting staggered tax rate changes across countries, we document two key findings. First, firm-level investment is less sensitive to changes in the corporate income tax rate when tax system complexity is higher, suggesting that such complexity can undermine the ability of tax policy to affect economic growth. Second, the impact of complexity on the sensitivity of investment to the tax rate varies significantly across firms, with domestic-owned, smaller, and private firms being more affected by tax system complexity. The cross-sectional disparity in the effect suggests such complexity could reduce tax system parity. Our findings collectively suggest that corporate tax system complexity can negatively impact the ability of fiscal policy to affect investment and leads to heterogeneous tax policy responses across firms.

Keywords: Tax complexity, tax rates, investment, employment, competition

JEL Classification: D25, F23, H23, H25, G31

Suggested Citation

Amberger, Harald Johannes and Gallemore, John and Wilde, Jaron H., Corporate Tax System Complexity and Investment (February 2024). WU International Taxation Research Paper Series No. 2023-11, Kenan Institute of Private Enterprise Research Paper No. 4607146, Available at SSRN: https://ssrn.com/abstract=4607146 or http://dx.doi.org/10.2139/ssrn.4607146

Harald Johannes Amberger

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

John Gallemore (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

HOME PAGE: http://www.johngallemore.com

Jaron H. Wilde

University of Iowa - Henry B. Tippie College of Business ( email )

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5020 Main Library
Iowa City, IA 52242-1000
United States

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