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The role of the corporate income tax as an automatic stabilizer

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  • Thiess Buettner
  • Clemens Fuest

Abstract

This paper analyses the effectiveness of the corporate income tax as an automatic stabilizer. It employs a unique firm-level dataset of German manufacturers combining financial statements with firm-specific information about credit market restrictions. The results show that approximately 20 per cent of all firms report both positive taxable income and capital market restrictions. Taking account of the income tax rates and the size differences of the firms, we find that demand stabilization through the corporate income tax amounts to about 8 per cent of an initial shock to gross revenues. This stabilization effect varies over the business cycle and tends to increase during cyclical downturns.
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  • Thiess Buettner & Clemens Fuest, 2010. "The role of the corporate income tax as an automatic stabilizer," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(6), pages 686-698, December.
    • Handle: RePEc:kap:itaxpf:v:17:y:2010:i:6:p:686-698
    DOI: 10.1007/s10797-010-9155-7
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    3. Rieth, Malte & Checherita-Westphal, Cristina & Attinasi, Maria-Grazia, 2016. "Personal income tax progressivity and output volatility: Evidence from OECD countries," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 49(3), pages 968-996.
    4. Abdelkrim Araar & Luis Huesca, 2014. "Comparison of the Tax System Progressivity Over Time: Theory and Application with Mexican Data," Cahiers de recherche 1419, CIRPEE.
    5. VODĂ Alina Daniela & DOBROTĂ Gabriela & CRISTEA Loredana Andreea, 2020. "Heterogeneity Of Fiscal Policies," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 257-264, December.
    6. Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2012. "Automatic stabilizers and economic crisis: US vs. Europe," Journal of Public Economics, Elsevier, vol. 96(3), pages 279-294.
    7. Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2009. "Wie wirken die automatischen Stabilisatoren in der Wirtschaftskrise? Deutschland im Vergleich mit der EU und den USA," IZA Standpunkte 19, Institute of Labor Economics (IZA).
    8. Buettner Thiess & Hoenig Anja, 2016. "Determinants of Business Fixed Investment: Evidence from German Firm-Level Data," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 236(5), pages 533-556, October.
    9. Mathias Dolls & Clemens Fuest & Andreas Peichl, 2011. "Automatic Stabilizers, Economic Crisis and Income Distribution in Europe," Research in Labor Economics, in: Who Loses in the Downturn? Economic Crisis, Employment and Income Distribution, pages 227-255, Emerald Group Publishing Limited.
    10. Stevan Luković, 2014. "The Role Of The Automatic Stabilizers In Modern Economy," Ekonomika, Journal for Economic Theory and Practice and Social Issues 2014-01, „Ekonomika“ Society of Economists, Niš (Serbia).
    11. Funashima, Yoshito, 2015. "Automatic stabilizers in the Japanese tax system," Journal of Asian Economics, Elsevier, vol. 39(C), pages 86-93.
    12. Plamen Nikolov & Paolo Pasimeni, 2023. "Fiscal Stabilization in the United States: Lessons for Monetary Unions," Open Economies Review, Springer, vol. 34(1), pages 113-153, February.
    13. Checherita-Westphal, Cristina & Attinasi, Maria Grazia & Rieth, Malte, 2011. "Labour tax progressivity and output volatility: evidence from OECD countries," Working Paper Series 1380, European Central Bank.
    14. Mathias Dolls & Clemens Fuest & Andreas Peichl, 2012. "Automatic stabilization and discretionary fiscal policy in the financial crisis," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 1(1), pages 1-19, December.
    15. Mathias Dolls & Clemens Fuest & Andreas Peichl, 2010. "Wie wirken die automatischen Stabilisatoren in der Wirtschaftskrise? Deutschland im Vergleich zu anderen EU‐Staaten und den USA," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 11(2), pages 132-145, May.
    16. Luis Huesca Reynoso & Abdelkrim Araar, 2016. "Comparison of fiscal system progressivity over time: theory and application in Mexico," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 31(1), pages 3-45.
    17. Reinald Koch & Svea Holtmann & Henning Giese, 2023. "Losses never sleep – The effect of tax loss offset on stock market returns during economic crises," Journal of Business Economics, Springer, vol. 93(1), pages 59-109, January.
    18. Dolls, M. & Fuest, C. & Andreas Peichl, 2011. "GINI DP 23: Automatic Stabilizers, Economic Crisis and Income Distribution in Europe," GINI Discussion Papers 23, AIAS, Amsterdam Institute for Advanced Labour Studies.
    19. European Commission, 2010. "Tax Policy after the Crisis: Monitoring Tax Revenues and Tax Reforms in EU Member States 2010 Report," Taxation Papers 24, Directorate General Taxation and Customs Union, European Commission.

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    More about this item

    Keywords

    Corporate income tax; Stabilization; Capital market restrictions; Loss offset; Firm-level data; H25; H32; E63;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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