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Why do effective tax rates fall with capital intensity?

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  • Bournakis, I.
  • Christopoulos, D.

Abstract

This paper examines why corporate effective tax rates (ETRs) tend to decline as capital per worker increases. We decompose the ETR into two channels: a statutory cost-recovery component that mechanically lowers the taxable base with capital accumulation, and a discretionary tax-planning component whose effectiveness rises with capital intensity. Using firm-level data from six European countries, we estimate this relationship non-parametrically. We find that a 10% increase in capital intensity reduces the ETR by about 0.30 percentage points in Hungary, 0.11 points in Spain, and 0.10 points in Italy. By contrast, no significant relationship is found for France, Germany, and the UK, suggesting cross-country differences in cost-recovery provisions and enforcement environments.

Suggested Citation

  • Bournakis, I. & Christopoulos, D., 2026. "Why do effective tax rates fall with capital intensity?," Economics Letters, Elsevier, vol. 261(C).
    • Handle: RePEc:eee:ecolet:v:261:y:2026:i:c:s0165176526000212
    DOI: 10.1016/j.econlet.2026.112827
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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