Working Paper: CEPR ID: DP5769
Authors: Christian Keuschnigg
Abstract: Depending on the definition of the tax base, the statutory corporate tax rate implies rather different measures of effective average and marginal tax rates. This paper develops a model of a monopolistically competitive industry with extensive and intensive business investment and shows how these margins respond to changes in average and marginal corporate tax rates. Intensive investment refers to the size of a firm's capital stock. Extensive investment refers to the firm's production location and reflects the trade-off between exports and foreign direct investment as alternative modes of foreign market access. The paper derives comparative static effects of the corporate tax and shows how the cost of public funds depends on the elasticities of the extensive and intensive investment responses.
Keywords: Corporate Taxation; Costs of Public Funds; Exports; Foreign Direct Investment
JEL Codes: D21; F23; H25; L11; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in corporate tax rate (K34) | increase in effective marginal tax rate (EMTR) (H31) |
| increase in effective marginal tax rate (EMTR) (H31) | increase in user cost of capital (G31) |
| increase in user cost of capital (G31) | decrease in intensive investment (E22) |
| higher corporate taxes (G38) | decrease in net profits from exporting (F14) |
| decrease in net profits from exporting (F14) | increase in attractiveness of foreign direct investment (FDI) relative to exports (F23) |
| increase in effective average tax rate (EATR) (H26) | decrease in firm values from domestic export production (F23) |
| increase in effective average tax rate (EATR) (H26) | increase in foreign subsidiary production (F23) |
| increase in effective average tax rate (EATR) (H26) | more firms opting for foreign direct investment (FDI) over exports (F23) |
| welfare cost of corporate taxation (H29) | related to size of effective average tax rate (EATR) (H26) |
| welfare cost of corporate taxation (H29) | related to elasticity of investment responses (E22) |