Advanced Search
MyIDEAS: Login to save this paper or follow this series

Tax Losses and Firm Investment: Evidence from Tax Statistics

Contents:

Author Info

  • Walch, Florian
  • Dwenger, Nadja
Registered author(s):

    Abstract

    The elasticity of business capital to changes in its user cost is central to the economic analysis of fiscal policies. As a major component, the user cost of capital includes a firm's marginal tax rate. Due to the asymmetric treatment of tax losses and profits, the marginal tax rate can depart strongly from the statutory tax rate; it thus differs across firms. Previous studies have mis-measured the firm-specific marginal tax rate because of data limitations. This leads to a systematic mis-representation of the user cost of capital and neglects an important source of variation. We use a novel firm-level panel data set including official corporate income tax returns to overcome these problems. Our results show that accounting for tax losses reduces the estimated user cost elasticity of investment. Small and medium sized enterprises seem to be more responsive to tax incentives than larger firms. --

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://econstor.eu/bitstream/10419/48699/1/VfS_2011_pid_304.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis with number 48699.

    as in new window
    Length:
    Date of creation: 2011
    Date of revision:
    Handle: RePEc:zbw:vfsc11:48699

    Contact details of provider:
    Email:
    Web page: http://www.socialpolitik.org/
    More information through EDIRC

    Related research

    Keywords: Taxation; Business investment; Tax loss; Asymmetric treatment of profits and losses; User cost of capital;

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Alan J. Auerbach, 1986. "Tax Reform and Adjustment Costs: The Impact on Investment and Market Value," NBER Working Papers 2103, National Bureau of Economic Research, Inc.
    2. Nickell, Stephen J, 1977. "Uncertainty and Lags in the Investment Decisions of Firms," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 44(2), pages 249-63, June.
    3. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, Elsevier, vol. 87(1), pages 115-143, August.
    4. Mervyn A. King & Don Fullerton, 1984. "The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany," NBER Books, National Bureau of Economic Research, Inc, number king84-1.
    5. Austan Goolsbee, 2000. "The Importance of Measurement Error in the Cost of Capital," NBER Working Papers 7558, National Bureau of Economic Research, Inc.
    6. Stock, James H, 1987. "Asymptotic Properties of Least Squares Estimators of Cointegrating Vectors," Econometrica, Econometric Society, Econometric Society, vol. 55(5), pages 1035-56, September.
    7. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, Elsevier, vol. 126(1), pages 25-51, May.
    8. Goolsbee, Austan, 2004. "Taxes and the quality of capital," Journal of Public Economics, Elsevier, Elsevier, vol. 88(3-4), pages 519-543, March.
    9. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, The MIT Press, edition 2, volume 1, number 0262232588, December.
    10. Austan Goolsbee, 1997. "Investment Tax Incentives, Prices, and the Supply of Capital Goods," NBER Working Papers 6192, National Bureau of Economic Research, Inc.
    11. Cooper, Michael & Knittel, Matthew, 2006. "Partial Loss Refundability: How Are Corporate Tax Losses Used?," National Tax Journal, National Tax Association, vol. 59(3), pages 651-63, September.
    12. Christopher House & Matthew D. Shapiro, 2006. "Temporary Investment Tax Incentives: Theory with Evidence from Bonus Depreciation," NBER Working Papers 12514, National Bureau of Economic Research, Inc.
    13. Von Kalckreuth, Ulf, 2001. "Monetary transmission in Germany: new perspectives on financial constraints and investment spending," Working Paper Series, European Central Bank 0109, European Central Bank.
    14. Stacey Tevlin & Karl Whelan, 2000. "Explaining the investment boom of the 1990s," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2000-11, Board of Governors of the Federal Reserve System (U.S.).
    15. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 2000. "Investment-Cash Flow Sensitivities Are Useful: A Comment On Kaplan And Zingales," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 115(2), pages 695-705, May.
    16. Dreßler, Daniel & Overesch, Michael, 2010. "Investment impact of tax loss treatment: Empirical insights from a panel of multinationals," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 10-097, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    17. Maria Psillaki & Nikolaos Daskalakis, 2009. "Are the determinants of capital structure country or firm specific?," Small Business Economics, Springer, Springer, vol. 33(3), pages 319-333, October.
    18. Chirinko, Robert S. & Wilson, Daniel J., 2008. "State investment tax incentives: A zero-sum game?," Journal of Public Economics, Elsevier, Elsevier, vol. 92(12), pages 2362-2384, December.
    19. John Hutchinson & Ana Xavier, 2006. "Comparing the Impact of Credit Constraints on the Growth of SMEs in a Transition Country with an Established Market Economy," Small Business Economics, Springer, Springer, vol. 27(2), pages 169-179, October.
    20. Jean-Bernard Chatelain & Andrea Generale & Ignacio Hernando & Ulf von Kalckreuth & Philip Vermeulen, 2003. "New Findings on Firm Investment and Monetary Transmission in the Euro Area," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 19(1), pages 73-83.
    21. Banerjee, Anindya & Dolado, Juan J. & Galbraith, John W. & Hendry, David, 1993. "Co-integration, Error Correction, and the Econometric Analysis of Non-Stationary Data," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198288107, October.
    22. Steven N. Kaplan & Luigi Zingales, 2000. "Investment-Cash Flow Sensitivities are not Valid Measures of Financing Constraints," NBER Working Papers 7659, National Bureau of Economic Research, Inc.
    23. Fazzari, Steven M & Hubbard, R Glenn & Petersen, Bruce C, 1988. "Investment, Financing Decisions, and Tax Policy," American Economic Review, American Economic Association, American Economic Association, vol. 78(2), pages 200-205, May.
    24. Nadja Dwenger, 2008. "Tax Loss Offset Restrictions - Last Resort for the Treasury?: An Empirical Evaluation of Tax Loss Offset Restrictions Based on Micro Data," Discussion Papers of DIW Berlin 764, DIW Berlin, German Institute for Economic Research.
    25. Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1994. "A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 1-74.
    26. Cummins, J.G. & Hassett, K.A. & Hubbard, R.G., 1995. "tax Reforms and Investment: A Cross-Country Comparison," Working Papers, C.V. Starr Center for Applied Economics, New York University 95-28, C.V. Starr Center for Applied Economics, New York University.
    27. Robert E. Carpenter & Bruce C. Petersen, 2002. "Is The Growth Of Small Firms Constrained By Internal Finance?," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 298-309, May.
    28. Chang Nam & Doina Radulescu, 2007. "Effects of Corporate Tax Reforms on SMEs’ Investment Decisions under the Particular Consideration of Inflation," Small Business Economics, Springer, Springer, vol. 29(1), pages 101-118, June.
    29. Treadway, Arthur B, 1969. "On Rational Entrepreneurial Behaviour and the Demand for Investment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 36(106), pages 227-39, April.
    30. Caballero, Ricardo J, 1994. "Small Sample Bias and Adjustment Costs," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 52-58, February.
    31. Chatelain, Jean-Bernard & Generale, Andrea & Hernando, Ignacio & Von Kalckreuth, Ulf & Vermeulen, Philip, 2001. "Firm investment and monetary transmission in the euro area," Working Paper Series, European Central Bank 0112, European Central Bank.
    32. Mayer, Colin, 1986. "Corporation Tax, Finance and the Cost of Capital," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 53(1), pages 93-112, January.
    33. Joakim Westerlund, 2007. "Testing for Error Correction in Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(6), pages 709-748, December.
    34. Bean, Charles R, 1981. "An Econometric Model of Manufacturing Investment in the UK," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 91(361), pages 106-21, March.
    35. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
    36. Jorgenson, Dale W, 1971. "Econometric Studies of Investment Behavior: A Survey," Journal of Economic Literature, American Economic Association, vol. 9(4), pages 1111-47, December.
    37. Devereux, Michael P. & Keen, Michael & Schiantarelli, Fabio, 1994. "Corporation tax asymmetries and investment : Evidence from U.K. panel data," Journal of Public Economics, Elsevier, Elsevier, vol. 53(3), pages 395-418, March.
    38. Chirinko, Robert S. & Fazzari, Steven M. & Meyer, Andrew P., 1999. "How responsive is business capital formation to its user cost?: An exploration with micro data," Journal of Public Economics, Elsevier, Elsevier, vol. 74(1), pages 53-80, October.
    39. Bewley, R. A., 1979. "The direct estimation of the equilibrium response in a linear dynamic model," Economics Letters, Elsevier, Elsevier, vol. 3(4), pages 357-361.
    40. Edgerton, Jesse, 2010. "Investment incentives and corporate tax asymmetries," Journal of Public Economics, Elsevier, Elsevier, vol. 94(11-12), pages 936-952, December.
    41. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, Elsevier, vol. 68(1), pages 29-51, July.
    42. Chirinko, Robert S, 1993. "Business Fixed Investment Spending: Modeling Strategies, Empirical Results, and Policy Implications," Journal of Economic Literature, American Economic Association, vol. 31(4), pages 1875-1911, December.
    43. Robert S. Chirinko, 1993. "Business fixed investment spending: a critical survey of modeling strategies, empirical results, and policy implications," Research Working Paper, Federal Reserve Bank of Kansas City 93-01, Federal Reserve Bank of Kansas City.
    44. Kaplan, Steven N & Zingales, Luigi, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(1), pages 169-215, February.
    45. Banerjee, Anindya, et al, 1986. "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 253-77, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:zbw:vfsc11:48699. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.