Dynamic Effects of Corporate Taxation in Open Economy

Luisito Bertinelli (), Olivier Cardi (), Kübra Höke () and Romain Restout ()
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Luisito Bertinelli: uni.lu - Université du Luxembourg = University of Luxembourg = Universität Luxemburg
Olivier Cardi: CRED - Centre de Recherche en Economie et Droit - Université Paris-Panthéon-Assas, LUMS - Lancaster University Management School - Lancaster University
Kübra Höke: Impact Reporting
Romain Restout: UL - Université de Lorraine, BETA - Bureau d'Économie Théorique et Appliquée - AgroParisTech - UNISTRA - Université de Strasbourg - Université de Haute-Alsace (UHA) - Université de Haute-Alsace (UHA) Mulhouse - Colmar - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

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Abstract: We exploit the downward and common trend of profits' taxation across OECD countries rooted into tax competition to identify exogenous shocks to corporate taxation. By adopting an internal instrument SVAR strategy, our evidence reveals that a permanent decline in profits' taxation leads to significant technology improvements concentrated in traded industries and generates an expansionary effect on hours concentrated in the non-traded sector. While technology dramatically improves in English-speaking and Scandinavian countries, hours significantly and persistently increase in continental Europe. A two-sector open economy model with endogenous technology decisions can rationalize the evidence conditional on a set of elements related to preferences and technology. To account for large technology improvements in former countries, traded industries must be highly intensive in R&D, exposed to foreign technology and display low technology utilization adjustment costs while habit persistence in consumption along with wage stickiness shape the expansionary effect on nontradable hours in continental Europe.

Keywords: Open economy; Wage stickiness; Labor reallocation; Tradables and non-tradables; Hours worked; R&D; Endogenous technological change; SVAR; Corporate taxation (search for similar items in EconPapers)
Date: 2025-09-04
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