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Homogeneous Profit Tax Effects for Heterogeneous Firms?

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  • Peter Egger
  • Simon Loretz

Abstract

Abstract In most countries, profit taxation is probably much more relevant nowadays than trade liberalisation when it comes to firm-level decisions about investment. Empirically, firms are quite heterogeneous with regard to fixed costs: the composition of assets (tangible versus intangible; machinery versus buildings; etc.) and the financing of investments. Then, even uniform changes in profit tax instruments cause heterogeneous responses of firm-level effective tax rates and, hence, after-tax profits. We argue that, with similar profit margins, firms would then require pre-tax profits to differ as well. Governments change statutory profit tax rates and, by virtue of firms' heterogeneity, they cause stark selection effects which are mainly related to heterogeneous fixed rather than variable costs. We compute costs of capital for a large sample of firms to illustrate how homogeneous changes in tax instruments hit firms differently. Using Bureau van Dijk's ORBIS database, we illustrate that the effects of changes in statutory instruments have relatively large systematic variance components across industries within countries and also relatively large ones of firms within industries and countries. Copyright 2010 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal World Economy.

Volume (Year): 33 (2010)
Issue (Month): 8 (08)
Pages: 1023-1041

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Handle: RePEc:bla:worlde:v:33:y:2010:i:8:p:1023-1041

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0378-5920

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Cited by:
  1. Daniela Federici & Valentino Parisi, 2012. "Corporate Taxation and Exports," Working Papers 2012-01, Universita' di Cassino, Dipartimento di Scienze Economiche.

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