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Tax Losses and Firm Investment: Evidence from Tax Statistics

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  • Walch, Florian
  • Dwenger, Nadja

Abstract

The elasticity of business capital to changes in its user cost is central to the economic analysis of fiscal policies. As a major component, the user cost of capital includes a firm's marginal tax rate. Due to the asymmetric treatment of tax losses and profits, the marginal tax rate can depart strongly from the statutory tax rate; it thus differs across firms. Previous studies have mis-measured the firm-specific marginal tax rate because of data limitations. This leads to a systematic mis-representation of the user cost of capital and neglects an important source of variation. We use a novel firm-level panel data set including official corporate income tax returns to overcome these problems. Our results show that accounting for tax losses reduces the estimated user cost elasticity of investment. Small and medium sized enterprises seem to be more responsive to tax incentives than larger firms.

Suggested Citation

  • Walch, Florian & Dwenger, Nadja, 2011. "Tax Losses and Firm Investment: Evidence from Tax Statistics," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48699, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc11:48699
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    References listed on IDEAS

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    Cited by:

    1. Creedy, John & Gemmell, Norman, 2015. "Taxation and the User Cost of Capital : An Introduction," Working Paper Series 4236, Victoria University of Wellington, Chair in Public Finance.

    More about this item

    Keywords

    Taxation; Business investment; Tax loss; Asymmetric treatment of profits and losses; User cost of capital;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis

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