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Extensive and Intensive Investment and the Dead Weight Loss of Corporate Taxation

Christian Keuschnigg

University of St. Gallen Department of Economics working paper series 2006 from Department of Economics, University of St. Gallen

Abstract: The routine way of anticipating the effects of the corporate (profit) tax on investments and location choice is to calculate the effective marginal and average tax rates. This paper introduces a model of monopolistic competition to show how investment on the extensive and intensive margins responds to changes in the effective marginal and average tax rates. Intensive investment reflects the marginal expansion of established businesses. Extensive investment refers to the location of new production sites and reflects the choice between exports and foreign direct investments as alternative strategies of foreign market access. The paper calculates the comparative static effects of the corporate tax and shows how the dead weight loss of the tax depends on the elasticities of extensive and intensive investments.

Keywords: Exports; foreign direct investment; corporate tax; dead weight loss (search for similar items in EconPapers)
JEL-codes: D21 F23 H25 L11 L22 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2006-07
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-pbe and nep-pub
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