IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/13341.html
   My bibliography  Save this paper

Heterogeneous Tax Sensitivity of Firm-level Investments

Author

Listed:
  • Egger, Peter
  • Erhardt, Katharina
  • Keuschnigg, Christian

Abstract

This paper introduces a stylized theoretical framework to identify five different firm types depending on their financial situation and their ownership structure. Based on these firm types, the model explains the heterogeneous tax sensitivity of firm-level investments. Guided by the theoretical model, we empirically identify these partly latent firm types using a threshold estimation approach. The empirical analysis uses a large firm database for 17 countries allowing for a quantification of the regime-specific investment responses to taxation. We find important differences in the tax sensitivity of investment across firm-types for dividend as well as for corporate taxation. The impact of corporate taxation is up to 70% higher for entrepreneurial firms than for managerial firms. In contrast, dividend taxation has a comparable negative effect for cash-constrained managerial firms and entrepreneurial firms but no significant impact on their unconstrained counterparts.

Suggested Citation

  • Egger, Peter & Erhardt, Katharina & Keuschnigg, Christian, 2018. "Heterogeneous Tax Sensitivity of Firm-level Investments," CEPR Discussion Papers 13341, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13341
    as

    Download full text from publisher

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=13341
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. François Gourio & Jianjun Miao, 2010. "Firm Heterogeneity and the Long-Run Effects of Dividend Tax Reform," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 131-168, January.
    2. Seo, Myung Hwan & Linton, Oliver, 2007. "A smoothed least squares estimator for threshold regression models," Journal of Econometrics, Elsevier, vol. 141(2), pages 704-735, December.
    3. Peter Egger & Valeria Merlo & Georg Wamser, 2014. "Unobserved Tax Avoidance and the Tax Elasticity of FDI," CESifo Working Paper Series 4921, CESifo.
    4. Hassett, Kevin A. & Hubbard, R. Glenn, 2002. "Tax policy and business investment," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.),Handbook of Public Economics, edition 1, volume 3, chapter 20, pages 1293-1343, Elsevier.
    5. Calomiris, Charles W & Hubbard, R Glenn, 1995. "Internal Finance and Investment: Evidence from the Undistributed Profits Tax of 1936-37," The Journal of Business, University of Chicago Press, vol. 68(4), pages 443-482, October.
    6. Steven M. Fazzari & Bruce C. Petersen, 1993. "Working Capital and Fixed Investment: New Evidence on Financing Constraints," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 328-342, Autumn.
    7. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September.
    8. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-1721, September.
    9. Guiso, Luigi, 1998. "High-tech firms and credit rationing," Journal of Economic Behavior & Organization, Elsevier, vol. 35(1), pages 39-59, March.
    10. Thomas Chaney & David Sraer & David Thesmar, 2012. "The Collateral Channel: How Real Estate Shocks Affect Corporate Investment," American Economic Review, American Economic Association, vol. 102(6), pages 2381-2409, October.
    11. Hansen, Bruce E., 1999. "Threshold effects in non-dynamic panels: Estimation, testing, and inference," Journal of Econometrics, Elsevier, vol. 93(2), pages 345-368, December.
    12. Ronald B. Davies & Carsten Eckel, 2010. "Tax Competition for Heterogeneous Firms with Endogenous Entry," American Economic Journal: Economic Policy, American Economic Association, vol. 2(1), pages 77-102, February.
    13. Auerbach, Alan J, 1983. "Taxation, Corporate Financial Policy and the Cost of Capital," Journal of Economic Literature, American Economic Association, vol. 21(3), pages 905-940, September.
    14. Yi-Chen Lin, 2007. "The cash flow sensitivity of cash: evidence from Taiwan," Applied Financial Economics, Taylor & Francis Journals, vol. 17(12), pages 1013-1024.
    15. Desai, Mihir A. & Dyck, Alexander & Zingales, Luigi, 2007. "Theft and taxes," Journal of Financial Economics, Elsevier, vol. 84(3), pages 591-623, June.
    16. Raj Chetty & Emmanuel Saez, 2005. "Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut," The Quarterly Journal of Economics, Oxford University Press, vol. 120(3), pages 791-833.
    17. Richard Chiburis & Michael Lokshin, 2007. "Maximum likelihood and two-step estimation of an ordered-probit selection model," Stata Journal, StataCorp LP, vol. 7(2), pages 167-182, June.
    18. Raj Chetty & Emmanuel Saez, 2010. "Dividend and Corporate Taxation in an Agency Model of the Firm," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 1-31, August.
    19. Ozkan, Aydin & Ozkan, Neslihan, 2004. "Corporate cash holdings: An empirical investigation of UK companies," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2103-2134, September.
    20. Philippe Aghion & Thibault Fally & Stefano Scarpetta, 2007. "Credit constraints as a barrier to the entry and post-entry growth of firms," PSE-Ecole d'économie de Paris (Postprint) hal-00813557, HAL.
    21. Andrew Ellul & Marco Pagano & Fausto Panunzi, 2010. "Inheritance Law and Investment in Family Firms," American Economic Review, American Economic Association, vol. 100(5), pages 2414-2450, December.
    22. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-586, June.
    23. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1991. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," The Quarterly Journal of Economics, Oxford University Press, vol. 106(1), pages 33-60.
    24. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, September.
    25. Simon Bösenberg & Peter Egger & Benedikt Zoller-Rydzek, 2018. "Capital taxation, investment, growth, and welfare," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(2), pages 325-376, April.
    26. Ruud A. de Mooij & Sjef Ederveen, 2008. "Corporate tax elasticities: a reader's guide to empirical findings," Oxford Review of Economic Policy, Oxford University Press, vol. 24(4), pages 680-697, winter.
    27. International Finance Corporation & World Bank, "undated". "Doing Business in the Arab World 2012 : Doing Business in a More Transparent World," World Bank Other Operational Studies 16303, The World Bank.
    28. Michael Lokshin & Zurab Sajaia, 2004. "Maximum likelihood estimation of endogenous switching regression models," Stata Journal, StataCorp LP, vol. 4(3), pages 282-289, September.
    29. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    30. Simeon Djankov & Tim Ganser & Caralee McLiesh & Rita Ramalho & Andrei Shleifer, 2010. "The Effect of Corporate Taxes on Investment and Entrepreneurship," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 31-64, July.
    31. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
    32. Hendrik Jungmann & Simon Loretz, 2019. "On the measurement of investment types: Heterogeneity in corporate tax elasticities," The World Economy, Wiley Blackwell, vol. 42(2), pages 478-508, February.
    33. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    34. Scarpetta, Stefano & Fally, Thibault & Aghion, Philippe, 2007. "Credit Constraints as a Barrier to the Entry and Post-Entry Growth of Firms," Scholarly Articles 4554208, Harvard University Department of Economics.
    35. Mark Doms & Eric J. Bartelsman, 2000. "Understanding Productivity: Lessons from Longitudinal Microdata," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 569-594, September.
    36. Egger, Peter H. & Merlo, Valeria & Wamser, Georg, 2014. "Unobserved tax avoidance and the tax elasticity of FDI," Journal of Economic Behavior & Organization, Elsevier, vol. 108(C), pages 1-18.
    37. Sivadasan, Jagadeesh & Slemrod, Joel, 2008. "Tax law changes, income-shifting and measured wage inequality: Evidence from India," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2199-2224, October.
    38. Andrew Ellul & Tullio Jappelli & Marco Pagano & Fausto Panunzi, 2016. "Transparency, Tax Pressure, and Access to Finance," Review of Finance, European Finance Association, vol. 20(1), pages 37-76.
    39. Bronwyn H. Hall & Nathan Rosenberg (ed.), 2010. "Handbook of the Economics of Innovation," Handbook of the Economics of Innovation, Elsevier, edition 1, volume 1, number 1, 00.
    40. Terza, Joseph V., 1987. "Estimating linear models with ordinal qualitative regressors," Journal of Econometrics, Elsevier, vol. 34(3), pages 275-291, March.
    41. Thorsten Beck & Asli Demirgüç‐Kunt & Vojislav Maksimovic, 2005. "Financial and Legal Constraints to Growth: Does Firm Size Matter?," Journal of Finance, American Finance Association, vol. 60(1), pages 137-177, February.
    42. Danny Yagan, 2015. "Capital Tax Reform and the Real Economy: The Effects of the 2003 Dividend Tax Cut," American Economic Review, American Economic Association, vol. 105(12), pages 3531-3563, December.
    43. Diego Restuccia & Richard Rogerson, 2008. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 707-720, October.
    44. Roger Gordon & Martin Dietz, 2006. "Dividends and Taxes," NBER Working Papers 12292, National Bureau of Economic Research, Inc.
    45. Peter Egger & Doina Radulescu & Nora Strecker, 2013. "Effective labor taxation and the international location of headquarters," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(4), pages 631-652, August.
    46. Claudio Michelacci & Javier Suarez, 2004. "Business Creation and the Stock Market," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 459-481.
    47. Auerbach, Alan J. & Hassett, Kevin A., 2003. "On the marginal source of investment funds," Journal of Public Economics, Elsevier, vol. 87(1), pages 205-232, January.
    48. Hall, Bronwyn H. & Lerner, Josh, 2010. "The Financing of R&D and Innovation," Handbook of the Economics of Innovation, in: Bronwyn H. Hall & Nathan Rosenberg (ed.),Handbook of the Economics of Innovation, edition 1, volume 1, chapter 0, pages 609-639, Elsevier.
    49. Raj Chetty & Emmanuel Saez, 2006. "The Effects of the 2003 Dividend Tax Cut on Corporate Behavior: Interpreting the Evidence," American Economic Review, American Economic Association, vol. 96(2), pages 124-129, May.
    50. Himmelberg, Charles P & Petersen, Bruce C, 1994. "R&D and Internal Finance: A Panel Study of Small Firms in High-Tech Industries," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 38-51, February.
    51. Beck, Thorsten & Demirguc-Kunt, Asli, 2006. "Small and medium-size enterprises: Access to finance as a growth constraint," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2931-2943, November.
    52. 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.
    53. Peter Egger & Simon Loretz, 2010. "Homogeneous Profit Tax Effects for Heterogeneous Firms?," The World Economy, Wiley Blackwell, vol. 33(8), pages 1023-1041, August.
    54. 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.
    55. International Finance Corporation & World Bank, 2013. "Doing Business 2013 : Smarter Regulations for Small and Medium-Size Enterprises [Regulaciones inteligentes para las pequeñas y medianas empresas : resumen ejecutivo (Vol. 2)]," World Bank Publications, The World Bank, number 11857, June.
    56. Auerbach, Alan J., 2002. "Taxation and corporate financial policy," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.),Handbook of Public Economics, edition 1, volume 3, chapter 19, pages 1251-1292, Elsevier.
    57. Emmanuel Jimenez & Bernardo Kugler, 1987. "The Earnings Impact of Training Duration in a Developing Country: An Ordered Probit Selection Model of Colombia's Servicio Nacional de Aprendizaje (SENA)," Journal of Human Resources, University of Wisconsin Press, vol. 22(2), pages 228-247.
    58. International Finance Corporation & World Bank, 2012. "Doing Business 2012 : Doing Business in a More Transparent World," World Bank Publications, The World Bank, number 5907, June.
    59. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    60. Chirinko, Robert S & Schaller, Huntley, 1995. "Why Does Liquidity Matter in Investment Equations?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 527-548, May.
    61. repec:wbk:wboper:13331 is not listed on IDEAS
    62. A. J. Auerbach & M. Feldstein (ed.), 2002. "Handbook of Public Economics," Handbook of Public Economics, Elsevier, edition 1, volume 4, number 4.
    63. Beck, Thorsten & Demirgüç-Kunt, Asli & Maksimovic, Vojislav, 2008. "Financing patterns around the world: Are small firms different?," Journal of Financial Economics, Elsevier, vol. 89(3), pages 467-487, September.
    64. Philippe Aghion & Thibault Fally & Stefano Scarpetta, 2007. "Credit constraints as a barrier to the entry and post-entry growth of firms," Economic Policy, CEPR;CES;MSH, vol. 22, pages 731-779, October.
    65. World Bank & International Finance Corporation, "undated". "Doing Business in Italy 2013 : Smarter Regulations for Small and Medium-Size Enterprises," World Bank Other Operational Studies 13332, The World Bank.
    66. Eric Zwick & James Mahon, 2017. "Tax Policy and Heterogeneous Investment Behavior," American Economic Review, American Economic Association, vol. 107(1), pages 217-248, January.
    67. A. J. Auerbach & M. Feldstein (ed.), 2002. "Handbook of Public Economics," Handbook of Public Economics, Elsevier, edition 1, volume 3, number 3.
    68. World Bank & International Finance Corporation, "undated". "Doing Business in the East African Community 2013 : Smarter Regulation for Small and Medium-Size Enterprises," World Bank Other Operational Studies 16246, The World Bank.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hoseini, M., 2014. "Misreporting in the Value-Added Tax and the Optimal Enforcement," Discussion Paper 2014-061, Tilburg University, Center for Economic Research.
    2. Annette Alstadsæter & Martin Jacob & Roni Michaely, 2014. "Do Dividend Taxes Affect Corporate Investment?," CESifo Working Paper Series 4931, CESifo.
    3. Martin Falk, 2016. "Austria 2025 – Corporate Investment in Austria. Stylised Facts, Impacts, Determinants and Investment Policies," WIFO Studies, WIFO, number 59183, February.
    4. Hoseini, M., 2014. "Misreporting in the Value-Added Tax and the Optimal Enforcement," Other publications TiSEM b8a0a931-1092-4c98-bd36-4, Tilburg University, School of Economics and Management.
    5. Laurent Bach & Antoine Bozio & Brice Fabre & Arthur Guillouzouic & Claire Leroy & Clément Malgouyres, 2019. "Follow the money! Combining household and firm-level evidence to unravel the tax elasticity of dividend," Institut des Politiques Publiques halshs-02415470, HAL.
    6. Annette Alstadsæter & Martin Jacob & Roni Michaely, 2017. "Do Dividend Taxes Affect Corporate Investment?," NBER Chapters, in: Personal Income Taxation and Household Behavior (TAPES), National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Access to capital; corporate tax; Firm Heterogeneity; Manager-shareholder conflicts; Personal taxes;

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:13341. 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: (). General contact details of provider: https://www.cepr.org .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.