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Extensive and Intensive Investment and the Dead Weight Loss of Corporate Taxation

  • Christian Keuschnigg

    ()

The routine way of anticipating the effects of the corporate (profit) tax on investments and location choice is to calculate the effective marginal and average tax rates. This paper introduces a model of monopolistic competition to show how investment on the extensive and intensive margins responds to changes in the effective marginal and average tax rates. Intensive investment reflects the marginal expansion of established businesses. Extensive investment refers to the location of new production sites and reflects the choice between exports and foreign direct investments as alternative strategies of foreign market access. The paper calculates the comparative static effects of the corporate tax and shows how the dead weight loss of the tax depends on the elasticities of extensive and intensive investments.

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File URL: http://www1.vwa.unisg.ch/RePEc/usg/dp2006/DP16_Keu.pdf
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Paper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2006 with number 2006-16.

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Length: 33 pages
Date of creation: Jul 2006
Date of revision:
Handle: RePEc:usg:dp2006:2006-16
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  1. Devereux, Michael P. & Griffith, Rachel, 2002. "Evaluating Tax Policy for Location Decisions," CEPR Discussion Papers 3247, C.E.P.R. Discussion Papers.
  2. Grossman, Gene & Helpman, Elhanan, 2002. "Outsourcing in a Global Economy," CEPR Discussion Papers 3165, C.E.P.R. Discussion Papers.
  3. Michael P. Devereux & R. Glenn Hubbard, 2000. "Taxing Multinationals," NBER Working Papers 7920, National Bureau of Economic Research, Inc.
  4. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, MIT Press, vol. 117(3), pages 1039-1073, August.
  5. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
  6. Ronald B. Davies, 2004. "Tax Treaties and Foreign Direct Investment: Potential versus Performance," International Tax and Public Finance, Springer, vol. 11(6), pages 775-802, November.
  7. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September.
  8. Herwig Immervoll & Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2005. "Welfare Reform in European Countries: A Microsimulation Analysis," OECD Social, Employment and Migration Working Papers 28, OECD Publishing.
  9. Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup, 2006. "The marginal cost of public funds: Hours of work versus labor force participation," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1955-1973, November.
  10. Janeba, Eckhard, 1997. "International Tax Competition," Beiträge zur Finanzwissenschaft, Mohr Siebeck, Tübingen, edition 1, volume 1, number urn:isbn:9783161467967, May.
  11. Michael P. Devereux & Rachel Griffith & Alexander Klemm, 2002. "Corporate income tax reforms and international tax competition," Economic Policy, CEPR;CES;MSH, vol. 17(35), pages 449-495, October.
  12. Fuest, Clemens, 2005. "Economic integration and tax policy with endogenous foreign firm ownership," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1823-1840, September.
  13. 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.
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