Corporate flat tax reforms and businesses’ investment decisions: evidence from Switzerland

This paper focuses on the effects of a corporate income flat tax reform on businesses’ investment decisions. Since 1990, several Swiss states (cantons) have been switching from a graduated to a flat tax rate scheme on profits. The paper assesses the effects of such a reform both on the number of establishments (i.e. extensive margin of investment) and on the number of employees (i.e. intensive margin) in a given jurisdiction by computing a difference-in-differences estimation. Our results suggest that the introduction of a flat tax reform on corporate income taxes has a negative and statistically significant impact on both margins of investment. Moreover, the effect is considerably larger for riskier firms, suggesting that progressive taxation acts as an insurance effect for risk-averse entrepreneurs.     

The extensive margin and monetary policy

The creation of new firms, referred to as the extensive margin, is a significant but overlooked dimension of monetary policy. A monetary VAR documents that monetary policy has significant effects on firm creation. An analytically tractable model combining sticky prices and firm entry shows that entry alters the transmission of monetary policy innovations, acting much like a type of investment in more standard models. Monetary policy rules that offset the uncertainty of productivity shocks can raise the mean level of entry and thereby welfare, suggesting a new motivation for stabilization policy.     

Corporate tax,capital structure,and the accessibility of bank loans: Evidence from China

In this paper, we investigate whether listed firms in China adjust their capital structure in response to an increase in the corporate tax rate. Although theories of capital structure suggest that corporate tax is an important determinant of capital structure, how exogenous changes of the tax rate affect firms’ leverage decisions has not been fully explored. We examine a unique circumstance in which the Chinese government increased the corporate tax rate of firms that had previously received local government tax rebates. The evidence indicates that these firms increased their leverage when the corporate tax rate increased. Further investigation suggests that the adjustment of leverage was mostly driven by firms with a high level of access to bank loans.     

Do corporate tax cuts increase investments?

This paper studies the effect of corporate taxes on investment. Since firms with a foreign parent have more cross-country profit shifting opportunities than domestically owned firms do, their effective tax rate and, consequently, their tax-induced costs to investment are lower. We therefore expect capital investment responses to a corporate tax cut to be heterogeneous across firms. Using firm-level data on German corporations, we exploit the 2008 tax reform, which substantially cut corporate taxes as an exogenous policy shock and expect domestically owned firms' investments to be more responsive to the reform. We show exactly this in a difference-in-differences setting. We find that the reduction in corporate tax payments led to a one-to-one increase in the real investments of domestic firms. The effect is stronger for domestic firms relying more on internal funds. Correspondingly, labor investment increased more for domestic firms, ensuring a constant mix of input factors. In addition, we show that domestic firms' sales grew faster after the tax cut than the sales of foreign-owned firms. Our results imply that corporate tax changes can increase corporate investment but that domestic firms benefit more than foreign-owned firms from a tax cut through higher investment responses resulting in greater sales growth.     

Taxation and skills investment in frictional labor markets

This paper examines the effects of wage taxation and corporate income taxation on training investment in frictional labor markets. Because of labor market frictions, the wage structure is compressed and workers do not capture the entire return from their skills. As a result, both firms and workers have incentives to support part of the costs of training investments. The analysis shows that when decisions to invest in training are made by firms and workers acting cooperatively, a wage tax increases the level of investment in skills whereas a corporate income tax decreases it. In this case, the introduction of a small wage tax unambiguously increases efficiency. The effects of both types of taxes on training are reversed when investment decisions are taken by firms alone. In any case, a corporate income tax is not neutral with respect to decisions to invest in skills even if the full cost of investment is deducted from taxable income in the period when it is incurred and the tax system provides full loss offset.     

The effect of a common currency on the volatility of the extensive margin of trade

This paper studies the effects of the European monetary unification on the volatility of the extensive margin of trade. First, we highlight empirical novel facts about the effects of monetary unification. We build country-level measures of the extensive margin of intra-EMU exports and describe how their volatilities evolved over time. We show that the adoption of a common currency has been associated with an increase of the volatility of the extensive margin of exports for most countries, and a decrease in the volatility of the extensive margin of exports for Germany. Second, we address this question theoretically and build a two-country version of the model of Ghironi and Melitz (2005) with endogenous entry, heterogenous firms, endogenous tradability, endogenous labor supply and sticky prices. We compare the volatility of the extensive margin of trade under fixed exchange rates and in a monetary union. Monetary unification does imply an increase in the volatility of the extensive margin of trade for pre-EMU followers (such as France or the Netherlands) and a decrease in the volatility of the extensive margin of trade for the leader (Germany). This pattern is qualitatively consistent with the data but arises only if monetary policy responds moderately to output.     

Debt, taxes, and international equilibrium

This paper employs an extended Miller model to analyze capital structure decisions of individual firms in a two-country setting. Miller equilibria are generally not consistent with an international equilibrium if the tax subsidy of debt differs across countries. The most obvious reason for differential tax subsidies is differences between national corporate tax rates. We also identify differential tax subsidies of debt if inflation rates differ across countries. For both cases we examine the adjustment process from national equilibria to an international equilibrium without and with barriers to international investment. We derive the relationship between the equilibrium yields on debt and equity in the two countries and discuss the Fisher hypothesis that real returns do not depend upon inflation in a two-country Miller world.     

The effect of investment tax incentives: evidence from China’s value-added tax reform

We estimate the impact of investment tax credit on firm fixed investment in a difference-in-differences-in-differences framework, using China’s 2004 value-added tax reform pilot that introduces a permanent 17%-tax credit for fixed investment in six industries in the Northeastern region. The tax credit raises significantly fixed investment of eligible firms by 28% on average during 2004–2007 relative to 2001–2003, corresponding to a user cost elasticity of 1.84. The tax incentive has larger effects on firms that are less financially constrained such as smaller firms and firms with a larger cash flow. The result is largely driven by responses of domestic private firms and is robust to specifications addressing the issue of anticipation.     

Dividend taxes and investment efficiency: Evidence from the 2003 U.S. personal taxation reform

We examine the effect of a large dividend tax cut on corporate investment efficiency by exploiting the 2003 personal taxation reform in the U.S. as a quasi-natural experiment. Using a difference-in-differences approach based on the probability that a firm’s marginal investor was an individual investor, we show that the 2003 dividend tax cut significantly improved the investment efficiency of U.S. listed firms. However, we find no evidence that the dividend tax cut increased the level of investment of U.S. listed firms. Further, we show that the tax cut increased investment efficiency by mitigating agency problems associated with the excessive free cash flows of overinvesting firms and by relaxing the financial constraints of underinvesting firms.     

To Invest or not to Invest: A real options approach to FDIs and tax competition

Foreign investment decisions of firms are often characterized by investment irreversibility, uncertainty, and the ability to choose the optimal timing of foreign investments. We embed these characteristics into a real option theory framework to analyze international competition among countries to attract mobile investments when firms, after the investment is sunk, can shift profit to low tax countries by transfer pricing. We find that an increase in the uncertainty of profit income reduces the equilibrium tax rates, whilst lower investment costs or larger profits, counteracts the negative fiscal externality of tax competition leading to higher equilibrium tax rates. JEL Code H25     

How Firms Make Capital Expenditure Decisions: Financial Signals, Internal Cash Flows, Income Taxes and the Tax Reform Act of 1986

This paper empirically assesses the determinants of future net capital expenditures for a broad cross-section of COMPUSTAT firms from 1973 to 1989. We explore three general categories of factors expected to affect investment: (1) external equity financing, (2) internally generated accounting information, and (3) tax incentives. We find that external financing and information plays a role in that both positive stock returns and equity issuances indicate future increases in investment. The results suggest that high stock prices not only lower the cost of capital, but also signal good investment opportunities. Accounting information about internal sources and uses of funds are also important in the investment decision. In particular, net income and depreciation are positive indicators of future investment while there is a tradeoff between the payment of dividends and investment. Further, positive changes in available cash liquidity also motivate future investment. While taxes are not important in the investment decision on average, we find that firms with previously higher income taxes invested substantially more in 1985 and 1986. This coincides with the repeal of the investment tax credit and the accelerated depreciation schedules in the Tax Reform Act of 1986. We view this as evidence that federal tax policy in the 1980's induced firms with high income tax obligations to accelerate capital expenditures just before the favorable tax treatment of capital expenditures was eliminated.     

Corporate responses to the repatriation incentives and domestic production activities deduction

The 2004 American Jobs Creation Act (AJCA or the Act) sought to encourage U.S. companies to repatriate foreign earnings and invest them domestically in an effort to increase capital spending and employment. This investigation looks at how the two tax provisions in AJCA, i.e., the repatriation tax holiday and the domestic production activities deduction (DPAD), affected domestic investment and payout behaviors. An examination of repatriating firms based on the tightness of their capital constraints shows that the tax incentives fail to induce non-constrained, repatriating firms that benefit from DPAD to reinvest the capital domestically. Only capital-constrained, repatriating firms benefitting from DPAD increase domestic investment and reduce share repurchases; however, these firms also increase their cash dividend payments. The findings should be useful to policymakers as they consider modifying the corporate tax structure to increase domestic investment by encouraging U.S. firms to repatriate foreign earnings and reinvest them domestically.     

The Effect of Taxes and Depreciation on Corporate Investment and Financial Leverage

This paper provides an analysis of the effect of corporate and personal taxes on the firm's optimal investment and financing decisions under uncertainty. It extends the DeAngelo and Masulis capital structure model by endogenizing the firm's investment decision. The authors' results indicate that, when investment is allowed to adjust optimally, the existing predictions about the relationship between investment-related and debt-related tax shields must be modified. In particular, the authors show that increases in investment-related tax shields due to changes in the corporate tax code are not necessarily associated with reductions in leverage at the individual firm level. In cross-sectional analysis, firms with higher investment-related tax shields (normalized by expected earnings) need not have lower debt-related tax shields (normalized by expected earnings) unless all firms utilize the same production technology. Differences in production technologies across firms may thus explain why the empirical results of recent cross-sectional studies have not conformed to the predictions of DeAngelo and Masulis.     

Accounting for development through investment prices

Cross-country income gaps are large in the data. Can observed investment prices account for these gaps? Our model adds an extensive margin to the neoclassical growth model by allowing for entry of firms. When combined with a “returns to variety” effect, our model provides an amplification mechanism from investment prices to output. Using cross-country data on relative investment prices, the model can explain up to 5 to 6-fold income differences between the richest and poorest countries in our sample while simultaneously reducing the implied cross-country TFP differences.     

税费替代:增值税减税、非税收入征管与企业投资

通过减税促进企业投资和提振宏观经济是近年来中国税收制度改革的重要目标,但减税政策的实际效果却存在争议。本文利用2009年增值税转型改革,研究了减税对地方政府税费收入和企业非税负担的影响,从税费替代的角度揭示非税负担变动如何影响企业固定资产投资。研究发现:(1)增值税转型在减税的同时提高了地方政府非税收入并加重了企业非税负担,地方财政收入受增值税转型冲击越大,企业非税负担上升越明显。(2)上述应主要体现在小型、微型和民营企业上,大中型、非民营企业的非税负担未发生明显变化。(3)非税负担上升会显著抑制小型、微型和民营企业的固定资产投资,促使小型微型和民营企业通过持有更多现金和减少流动性负债来应对税费负担不确定性。本文有助于理解减税政策对小型微型和民营企业非税负担的溢出效应及其影响,为通过减税降费促进投资和提振经济提供经验支撑。     

Nonlinear Employment Effects of Tax Policy

We study the nonlinear propagation mechanism of tax policy in a heterogeneous-agent equilibrium business cycle model with search frictions in the labor market and an extensive margin of employment adjustment. The model exhibits endogenous job destruction and endogenous hiring standards in the form of occasionally-binding zero-surplus constraints. After parameterizing the model using U.S. data, we find that the dynamic response of employment to a temporary change in the labor income tax is highly nonlinear, displaying sizable asymmetries and state dependence. Notably, the response to a tax rate cut is at least twice as large in a recession as in an expansion.     

Structural identification of high and low investment regimes

We propose a structural model to investigate the existence and possible differences between low and high regimes of investment expenditures in equipment at the firm level. The existence of such differences is predicted by recent theoretical studies of investment behavior stressing the role of asymmetries and non-convexities in the adjustment cost technology. The structural spike model is estimated for a balanced panel of Dutch firms operating in 13 different industrial sectors. The flexibility of the structural approach explains why the proposed method outperforms models applying “ad hoc” spike definitions often encountered in the empirical literature of lumpy investments.     

Should Firms Going Public Enjoy Tax Benefits? An Analysis of the Italian Experience in the 1990s

In Italy tax benefits are granted to firms going public. However, does such tax relief really reduce the corporate tax burden? In this study we tackle the issue by considering 21 industrial firms that were listed on the Italian Exchange from 1995 to 1997 and enjoyed a temporary tax rate cut‐off. We find that the increase in the taxable income reported by these firms largely counterbalances the effect of the tax relief. We conclude that a tax rate cut‐off may not necessarily provoke a reduction in the tax burden for newly listed firms, since in the short term they report larger earnings compared with privately‐owned companies. We claim that this ‘induced’ effect is mainly due to: the significant improvement of operating performance in the year of the listing; the reduction of the debt tax shield; an increase in investment and more accounting transparency. Our findings suggest that tax relief for IPO firms does not necessarily mean a loss of revenue for the government.     

Investment impact of tax loss treatment—empirical insights from a panel of multinationals

We analyze the impact of tax loss treatment on multinational investment. Basically, two effects of tax loss treatment can be expected. First, firms make their investment decisions considering potential future losses. Then, the various types of conceivable loss offset provisions affect investment decisions. Secondly, existing loss carryforwards resulting from losses in the past affect the tax rate elasticity of current investment decisions. Our empirical analysis is based on data of German multinationals. We pay particular attention to industries having a high probability to make losses. Our regression results suggest that a short carryforward time limit lowers investment in particular for firms with a high loss probability. We only find mixed evidence that group loss offsetting provisions foster investment. Concerning the effects of existing losses carried forward, we find a reduced tax rate elasticity of investment for companies shielded by loss carryforwards.