The Determinants of Private Investment in Russia: The Role of Corporate Income Tax

The level of private investment has traditionally been in the focus of government attention, especially in the conditions of currently low economic growth observed in Russia. Potentially, tax policy affects the investment decisions of companies, firstly, due to changes in investment costs, and secondly, due to sources of financing: for some companies access to loans is limited. At the same time, studies show that, depending on the institutional conditions and the level of development of the financial sector, the importance of the state tax policy as a determinant of investment varies from a sufficiently significant impact to its complete absence. It is also emphasized in empirical research that the influence of tax policy on the investment activity of a company highly depends on the individual characteristics. The impact of corporate tax rate on the level of investment is investigated on a sample of Russian companies for 2006–2018 period. A censored model with fixed individual effects is estimated on the panel data. The results indicate that an increase in corporate income tax rate has a significant negative effect on the investments of companies. At the same time, the scale of this effect differs significantly for companies depending on their characteristics. The sensitivity to the income tax rate is maximum for small companies with little amount of own funds for investment. As a rule, this is due to the limited access of such companies to loans, and therefore a lower corporate income tax rate increases the resources available for investment. We conclude that for small companies setting lower tax rates contributes to the growth of investment activity in the region.