Extensive and Intensive Investment and the Dead Weight Loss of Corporate Taxation

University of St. Gallen Economics Discussion Paper Series No. 16-2006

33 Pages Posted: 20 Jul 2006

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: June 2006

Abstract

The routine way of anticipating the effects of the corporate (profit) tax on investments and location choice is to calculate the effective marginal and average tax rates. This paper introduces a model of monopolistic competition to show how investment on the extensive and intensive margins responds to changes in the effective marginal and average tax rates. Intensive investment reflects the marginal expansion of established businesses. Extensive investment refers to the location of new production sites and reflects the choice between exports and foreign direct investments as alternative strategies of foreign market access. The paper calculates the comparative static effects of the corporate tax and shows how the dead weight loss of the tax depends on the elasticities of extensive and intensive investments.

Keywords: Exports, foreign direct investment, corporate tax, dead weight loss

JEL Classification: D21, F23, H25, L11, L22

Suggested Citation

Keuschnigg, Christian, Extensive and Intensive Investment and the Dead Weight Loss of Corporate Taxation (June 2006). University of St. Gallen Economics Discussion Paper Series No. 16-2006. Available at SSRN: https://ssrn.com/abstract=917771 or http://dx.doi.org/10.2139/ssrn.917771

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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