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Corporate Taxes and the Growth of the Firm

Federica Liberini

No 14-354, KOF Working papers from KOF Swiss Economic Institute, ETH Zurich

Abstract: It is desirable to reduce the number of "artificial" merger and acquisitions (MA) designed to escape from high tax jurisdictions, without discouraging domestic firms from growing into highly productive multinational corporations. This paper studies the effect of corporate taxes on the headquarter's decision to expand its extensive margins through the acquisition of pre-existing firms. A model for the investment behaviour of heterogeneous firms is built, and Corporate taxes are introduced. The model shows that higher home statutory corporate tax rates make exports relatively more expensive, making firms more likely to serve foreign demand through cross-border acquisitions. The model's predictions are tested on a dynamic random parameter probit model estimated on firm-level data. The model's predictions are confirmed by the results from the empirical investigation. The data also support the hypothesis that there are sunk costs associated with becoming a multinational corporation, and that domestic firm that overcome these costs and acquire their first foreign subsidiary are more likely to complete further acquisitions. In addition, the inability to shift profit to foreign locations makes domestic firms more sensitive to home corporate taxes, as their capacity to capture investment opportunity is negatively affected by a reduction in net tax profit.

Pages: 78 pages
Date: 2014-03
New Economics Papers: this item is included in nep-acc, nep-bec, nep-pbe and nep-pub
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Citations: View citations in EconPapers (3) Track citations by RSS feed

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http://dx.doi.org/10.3929/ethz-a-010094539 (application/pdf)

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Working Paper: Corporate Taxes and the Growth of the Firm (2014) Downloads
Working Paper: Corporate Taxes and the Growth of the Firm (2014) Downloads
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