Tax Losses and Firm Investment: Evidence from Tax Statistics

Florian Walch and Nadja Dwenger

VfS Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis from Verein für Socialpolitik / German Economic Association

Abstract: The elasticity of business capital to changes in its user cost is central to the economic analysis of fiscal policies. As a major component, the user cost of capital includes a firm's marginal tax rate. Due to the asymmetric treatment of tax losses and profits, the marginal tax rate can depart strongly from the statutory tax rate; it thus differs across firms. Previous studies have mis-measured the firm-specific marginal tax rate because of data limitations. This leads to a systematic mis-representation of the user cost of capital and neglects an important source of variation. We use a novel firm-level panel data set including official corporate income tax returns to overcome these problems. Our results show that accounting for tax losses reduces the estimated user cost elasticity of investment. Small and medium sized enterprises seem to be more responsive to tax incentives than larger firms.

Keywords: Taxation; Business investment; Tax loss; Asymmetric treatment of profits and losses; User cost of capital (search for similar items in EconPapers)
JEL-codes: D22 G31 H25 H32 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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