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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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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2009/wp-cesifo-2009-09/cesifo1_wp2798.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2798.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2798

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Keywords: corporate income tax; stabilization; capital market restrictions; loss offset; firm-level data;

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References

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  1. Mathias Dolls & Clemens Fuest & Andreas Peichl, 2009. "Automatic Stabilizers and Economic Crisis: US vs. Europe," CESifo Working Paper Series 2878, CESifo Group Munich.
  2. von Kalckreuth, Ulf, 2008. "Financing constraints, firm level adjustment of capital and aggregate implications," Discussion Paper Series 1: Economic Studies 2008,11, Deutsche Bundesbank, Research Centre.
  3. Alan J. Auerbach & Daniel R. Feenberg, 2000. "The Significance of Federal Taxes as Automatic Stabilizers," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 14(3), pages 37-56, Summer.
  4. Alan J. Auerbach, 2009. "Implementing the New Fiscal Policy Activism," NBER Working Papers 14725, National Bureau of Economic Research, Inc.
  5. Devereux, Michael P. & Fuest, Clemens, 2009. "Is the Corporation Tax an Effective Automatic Stabilizer?," National Tax Journal, National Tax Association, vol. 62(3), pages 429-37, September.
  6. Xavier Sala-i-Martin & Jeffrey Sachs, 1991. "Fiscal Federalism and Optimum Currency Areas: Evidence for Europe From the United States," NBER Working Papers 3855, National Bureau of Economic Research, Inc.
  7. Bayoumi, Tamim & Masson, Paul R., 1995. "Fiscal flows in the United States and Canada: Lessons for monetary union in Europe," European Economic Review, Elsevier, Elsevier, vol. 39(2), pages 253-274, February.
  8. Ulf Von Kalckreuth, 2006. "Financial Constraints and Capacity Adjustment: Evidence from a Large Panel of Survey Data," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 73(292), pages 691-724, November.
  9. Darrel Cohen & Glenn Follette, 1999. "The automatic fiscal stabilizers: quietly doing their thing," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1999-64, Board of Governors of the Federal Reserve System (U.S.).
  10. Joseph A. Pechman, 1973. "Responsiveness of the Federal Individual Income Tax to Changes in Income," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(2), pages 385-428.
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Citations

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Cited by:
  1. Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2012. "Automatic stabilizers and economic crisis: US vs. Europe," Journal of Public Economics, Elsevier, Elsevier, vol. 96(3), pages 279-294.
  2. Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2010. "Automatic Stabilizers, Economic Crisis and Income Distribution in Europe," IZA Discussion Papers 4917, Institute for the Study of Labor (IZA).
  3. 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, Institute for the Study of Labor (IZA) 19, Institute for the Study of Labor (IZA).
  4. Fidrmuc, Jarko & Hainz, Christa, 2013. "The effect of banking regulation on cross-border lending," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(5), pages 1310-1322.
  5. European Commission, 2010. "Tax Policy after the Crisis: Monitoring Tax Revenues and Tax Reforms in EU Member States 2010 Report," Taxation Papers, Directorate General Taxation and Customs Union, European Commission 24, Directorate General Taxation and Customs Union, European Commission.
  6. Attinasi, Maria-Grazia & Checherita-Westphal, Cristina & Rieth, Malte, 2011. "Labour tax progressivity and output volatility: evidence from OECD countries," Working Paper Series, European Central Bank 1380, European Central Bank.
  7. 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, Verein für Socialpolitik, vol. 11(2), pages 132-145, 05.
  8. Daniel Dreßler & Michael Overesch, 2013. "Investment impact of tax loss treatment—empirical insights from a panel of multinationals," International Tax and Public Finance, Springer, Springer, vol. 20(3), pages 513-543, June.

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