Corporate taxes, investment and the self-financing rate. The effect of location decisions and exports

Thomas von Brasch (), Ivan Frankovic and Eero Tölö ()
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Thomas von Brasch: Statistics Norway, https://www.ssb.no/en/forskning/ansatte

Discussion Papers from Statistics Norway, Research Department

Abstract: In this paper, we study how lower corporate tax rates impact investment by including two novel channels into a DSGE model used for fiscal policy analysis in Norway. We capture both how foreign firms relocate and invest in the country when corporate taxes are reduced and how the inflow of FDI increase exports which spills over to domestic firms who then increase their investment further. We find that a one percentage point reduction in the corporate tax rate increases investment by 0.6%, most of which can be attributed to the FDI-export link. The corporate tax cut becomes self-financed when the FDI-export link is included, but only if other countries do not follow suit and also lower their corporate tax rates. When using the model to analyze the tax reform in Norway from 2014 to 2019, we find overall positive effects on investment and employment.

Keywords: Corporate profit tax; Foreign direct investment; Exports; Imports; User cost of capital; Depreciation; Tax reform (search for similar items in EconPapers)
JEL-codes: E62 H21 H25 H32 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2021-05
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-dge, nep-eec, nep-int, nep-mac, nep-pbe and nep-pub
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