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Is the Corporation Tax an Effective Automatic Stabilizer?

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  • Devereux, Michael P.
  • Fuest, Clemens

Abstract

We investigate the extent to which the corporation tax can act as an automatic stabilizer by smoothing the effects on investment of shocks to income. The main stabilizing effect would be through a reduced tax liability affecting the internal funds available for investment by credit-constrained companies. We present evidence for the United Kingdom that most credit-constrained firms have also been likely to be in a tax loss-making position, implying that the tax does not smooth investment, and thus is not an effective automatic stabilizer. A more generous treatment of tax losses would introduce significantly more automatic stabilization.

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  • Devereux, Michael P. & Fuest, Clemens, 2009. "Is the Corporation Tax an Effective Automatic Stabilizer?," National Tax Journal, National Tax Association, vol. 62(3), pages 429-437, September.
  • Handle: RePEc:ntj:journl:v:62:y:2009:i:3:p:429-37
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    Cited by:

    1. Daniel Dreßler & Michael Overesch, 2013. "Investment impact of tax loss treatment—empirical insights from a panel of multinationals," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(3), pages 513-543, June.
    2. Charles Bellemare & Bruce Shearer, 2014. "Measuring Ratchet Effects within a Firm: Evidence from a Field Experiment varying Contractual Commitment," Cahiers de recherche 1401, Centre de recherche sur les risques, les enjeux économiques, et les politiques publiques.
    3. Dolls, Mathias & Fuest, Clemens & Peichl, Andreas, 2012. "Automatic stabilizers and economic crisis: US vs. Europe," Journal of Public Economics, Elsevier, pages 279-294.
    4. 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 19, Institute for the Study of Labor (IZA).
    5. Stevan Luković, 2014. "The Role Of The Automatic Stabilizers In Modern Economy," Ekonomika, Journal for Economic Theory and Practice and Social Issues 2014-01, „Ekonomika“ Society of Economists, Niš (Serbia).
    6. Funashima, Yoshito, 2015. "Automatic stabilizers in the Japanese tax system," Journal of Asian Economics, Elsevier, pages 86-93.
    7. Bekaert, Geert & Ehrmann, Michael & Fratzscher, Marcel & Mehl, Arnaud, 2011. "Global crises and equity market contagion," CEPR Discussion Papers 8438, C.E.P.R. Discussion Papers.
    8. Alisdair McKay & Ricardo Reis, 2016. "The Role of Automatic Stabilizers in the U.S. Business Cycle," Econometrica, Econometric Society, vol. 84, pages 141-194, January.
    9. 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).
    10. Mathias Dolls & Clemens Fuest & Andreas Peichl, 2012. "Automatic stabilization and discretionary fiscal policy in the financial crisis," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 1(1), pages 1-19, December.
    11. 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, vol. 11(2), pages 132-145, May.
    12. Thiess Buettner & Clemens Fuest, 2010. "The role of the corporate income tax as an automatic stabilizer," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(6), pages 686-698, December.
    13. Luis Huesca Reynoso & Abdelkrim Araar, 2016. "Comparison of fiscal system progressivity over time: theory and application in Mexico," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 31(1), pages 3-45.
    14. Luigi, Bernardi, 2011. "Economic crisis and taxation in Europe," MPRA Paper 31007, University Library of Munich, Germany.
    15. Dolls, M. & Fuest, C. & Andreas Peichl, 2011. "GINI DP 23: Automatic Stabilizers, Economic Crisis and Income Distribution in Europe," GINI Discussion Papers 23, AIAS, Amsterdam Institute for Advanced Labour Studies.
    16. European Commission, 2010. "Tax Policy after the Crisis: Monitoring Tax Revenues and Tax Reforms in EU Member States 2010 Report," Taxation Papers 24, Directorate General Taxation and Customs Union, European Commission.
    17. Dinkel, Andreas, 2015. "Tax attractiveness and the allocation of risk within multinationals," arqus Discussion Papers in Quantitative Tax Research 189, arqus - Arbeitskreis Quantitative Steuerlehre.

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