Do corporate taxes distort capital allocation? Cross-country evidence from industry-level data

Serena Fatica

No 503, European Economy - Economic Papers 2008 - 2015 from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

Abstract: The working paper investigates the impacts of corporate taxes on the accumulation of different types of capital assets. The paper analyses the effect of corporate taxes on new investment in different types of capital assets in the manufacturing industries of 11 advanced economies over the period 1991-2007. The magnitude of the asset substitution elasticities points to a significant inter-asset distortionary effect induced by differences in the tax-adjusted user cost of capital. Overall, differential taxation leads on average to under-investment in ICT capital and to over-investment in other machinery and equipment compared to a counterfactual benchmark where marginal tax rates are equalized across assets. Once cross-country heterogeneity in corporate taxation is accounted for, the results are more mixed, in terms of both the size and the direction of the distortions. On average, 4 percent of the aggregate capital stock appears misallocated.

Pages: 34 pages
Date: 2013-09
New Economics Papers: this item is included in nep-acc, nep-hme, nep-law, nep-pbe, nep-pub and nep-tid
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:euf:ecopap:0503

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