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Extensive and Intensive Investment and the Dead Weight Loss of Corporate Taxation

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Author Info
Christian Keuschnigg ()

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Abstract

The routine way of anticipating the effects of the corporate (profit) tax on investments and location choice is to calculate the effective marginal and average tax rates. This paper introduces a model of monopolistic competition to show how investment on the extensive and intensive margins responds to changes in the effective marginal and average tax rates. Intensive investment reflects the marginal expansion of established businesses. Extensive investment refers to the location of new production sites and reflects the choice between exports and foreign direct investments as alternative strategies of foreign market access. The paper calculates the comparative static effects of the corporate tax and shows how the dead weight loss of the tax depends on the elasticities of extensive and intensive investments.

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File URL: http://www.vwa.unisg.ch/RePEc/usg/dp2006/DP16_Keu.pdf
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Publisher Info
Paper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2006 with number 2006-16.

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Length: 33 pages
Date of creation: Jul 2006
Date of revision:
Handle: RePEc:usg:dp2006:2006-16

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Related research
Keywords: Exports; foreign direct investment; corporate tax; dead weight loss;

Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure

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References listed on IDEAS
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  1. Haufler, Andreas & Schjelderup, Guttorm, 2000. "Corporate Tax Systems and Cross Country Profit Shifting," Oxford Economic Papers, Oxford University Press, vol. 52(2), pages 306-25, April.
    Other versions:
  2. Devereux, Michael P & Hubbard, R Glenn, 2003. "Taxing Multinationals," International Tax and Public Finance, Springer, vol. 10(4), pages 469-87, August. [Downloadable!] (restricted)
    Other versions:
  3. Michael Devereux & Rachel Griffith, 1996. "Taxes and the location of production: evidence from a panel of US multinationals," IFS Working Papers W96/14, Institute for Fiscal Studies.
    Other versions:
  4. Devereux, Michael P & Griffith, Rachel, 2003. "Evaluating Tax Policy for Location Decisions," International Tax and Public Finance, Springer, vol. 10(2), pages 107-26, March. [Downloadable!] (restricted)
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  5. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1039-1073, August. [Downloadable!] (restricted)
    Other versions:
  6. Kleven, Henrik & Kreiner, Claus Thustrup, 2006. "The Marginal Cost of Public Funds: Hours of Work versus Labor Force Participation," CEPR Discussion Papers 5594, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup, 2006. "The marginal cost of public funds: Hours of work versus labor force participation," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1955-1973, November. [Downloadable!] (restricted)
  8. Gene M. Grossman & Elhanan Helpman, 2002. "Outsourcing in a Global Economy," NBER Working Papers 8728, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Fuest, Clemens, 2005. "Economic integration and tax policy with endogenous foreign firm ownership," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1823-1840, September. [Downloadable!] (restricted)
  10. Ronald B. Davies, 2004. "Tax Treaties and Foreign Direct Investment: Potential versus Performance," International Tax and Public Finance, Springer, vol. 11(6), pages 775-802, November. [Downloadable!]
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  11. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition," Economic Policy, CEPR, CES, MSH, vol. 17(35), pages 449-495, October. [Downloadable!] (restricted)
  12. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November. [Downloadable!] (restricted)
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  13. Christian Keuschnigg & Martin D. Dietz, 2005. "A Growth Oriented Dual Income Tax," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  14. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March. [Downloadable!]
  15. repec:rus:hseeco:122439 is not listed on IDEAS
  16. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September. [Downloadable!] (restricted)
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