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Corporation Tax Asymmetries and Investment: Evidence from UK Panel Data

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  • Michael Devereux

Abstract

Theoretical work has emphasised the potential powerful impact of corporation tax asymmetries on investment behavior. Empirical work has been confined, however, to the essentially descriptive task of measuring implied effective tax rates. This paper uses panel data from 597 UK companies for 1973-1986 to address directly the central behavioral issue: are tax asymmetries important to understanding observed investment behavior? An optimizing investment model is developed and estimated both as an Euler equation in which the cost of capital appears and as a Q equation. Asymmetries are shown to generate considerable variation in firms' effective tax positions. Nevertheless, their careful modeling does not noticeably improve the empirical performance of these equations. Possible explanations of this puzzle are discussed.

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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_820.pdf
File Function: First version 1991
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 820.

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Length: 38 pages
Date of creation: Apr 1991
Date of revision:
Handle: RePEc:qed:wpaper:820

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Cited by:
  1. Andreas Haufler & Mohammed Mardan, 2013. "Cross-Border Loss Offset Can Fuel Tax Competition," CESifo Working Paper Series 4089, CESifo Group Munich.
  2. Wielhouwer, J.L. & Kort, P.M. & De Waegenaere, A.M.B., 1999. "Effects of tax depreciation on optimal firm investments," Discussion Paper 1999-58, Tilburg University, Center for Economic Research.
  3. Ahmed, S., 2004. "Modelling corporate tax liabilities using company accounts: a new framework," Cambridge Working Papers in Economics 0412, Faculty of Economics, University of Cambridge.
  4. Edgerton, Jesse, 2010. "Investment incentives and corporate tax asymmetries," Journal of Public Economics, Elsevier, vol. 94(11-12), pages 936-952, December.
  5. Alberto Alesina & Silvia Ardagna & Roberto Perotti & Fabio Schiantarelli, 1999. "Fiscal Policy, Profits, and Investment," NBER Working Papers 7207, National Bureau of Economic Research, Inc.
  6. Miquel Faig & Pauline Shum, 1996. "Irreversible Investment, Financing Choice and Asymmetric Corporate Taxes," Working Papers faig-96-01, University of Toronto, Department of Economics.
  7. Steve Bond & Michael Devereux & Alexander Klemm, 2005. "Dissecting dividend decisions: some clues about the effects of dividend taxation from recent UK reforms," IFS Working Papers W05/17, Institute for Fiscal Studies.
  8. Jack Mintz, 1995. "Corporation tax: a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 16(4), pages 23-68, November.
  9. Walch, Florian & Dwenger, Nadja, 2011. "Tax Losses and Firm Investment: Evidence from Tax Statistics," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48699, Verein für Socialpolitik / German Economic Association.
  10. Miquel Faig & Pauline Shum, 1997. "INVESTMENT IRREVERSIBILITY AND ENDOGENOUS FINANCING: An Evaluation of the Corporate Tax Effects," Working Papers faig-97-02, University of Toronto, Department of Economics.
  11. Michael P. O'Malley, 1996. "Tax exhaustion, firm investment, and leasing; a test of the Q model of investment," Finance and Economics Discussion Series 96-31, Board of Governors of the Federal Reserve System (U.S.).
  12. Zee, Howell H. & Stotsky, Janet G. & Ley, Eduardo, 2002. "Tax Incentives for Business Investment: A Primer for Policy Makers in Developing Countries," World Development, Elsevier, vol. 30(9), pages 1497-1516, September.

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