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Corporate Taxation and the Welfare State

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  • Christian Keuschnigg

    () (University of St. Gallen (IFF-HSG), CEPR and CESifo)

Abstract

The paper compares the impact of corporate taxation and social insurance on foreign direct investment (FDI) and unemployment. Four main results are derived: (i) the optimal size of the welfare state depends on the degree of risk-aversion and the unemployment rate as a measure of labor income risk. The unemployment rate partly reflects the country’s exposure to globalization; (ii) corporate taxation and social insurance have equivalent effects on unemployment and outbound FDI; (iii) while an increase in the corporate tax can raise corporate tax revenue, it is rather likely to worsen the government’s total fiscal stance. A corporate tax cut can thus be self-financing due to fiscal increasing returns in the presence of a large public sector; (iv) a corporate tax should be used to contribute to welfare state financing only in exceptional cases when job creation is excessive and the unemployment rate is inefficiently low. These conditions are probably unlikely to hold in Europe’s generous welfare states with high structural unemployment rates.

Suggested Citation

  • Christian Keuschnigg, 2008. "Corporate Taxation and the Welfare State," Working Papers 0813, Oxford University Centre for Business Taxation.
  • Handle: RePEc:btx:wpaper:0813
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    References listed on IDEAS

    as
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    Cited by:

    1. Horst Feldmann, 2011. "The Unemployment Puzzle of Corporate Taxation," Public Finance Review, , vol. 39(6), pages 743-769, November.
    2. Keuschnigg, Christian & Loretz, Simon & Winner, Hannes, 2014. "Tax Competition and Tax Coordination in the European Union: A Survey," Economics Working Paper Series 1427, University of St. Gallen, School of Economics and Political Science.
    3. Da Rin, M. & Di Giacomo, M. & Sembenelli, A., 2009. "Entrepreneurship, Firm Entry, and the Taxation of Corporate Income : Evidence from Europe (Revised version of DP 2008-65)," Discussion Paper 2009-61, Tilburg University, Center for Economic Research.
    4. Christian Keuschnigg, 2009. "The Role of Corporate Taxation in a Large Welfare State," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 145(IV), pages 443-452, December.

    More about this item

    Keywords

    Corporate tax; foreign direct investment; unemployment; welfare state;

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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