Heterogeneous tax sensitivity of firm-level investments☆

https://doi.org/10.1016/j.jebo.2020.05.008Get rights and content

Abstract

This paper introduces a stylized theoretical framework to identify five different firm types depending on their financial situation and their ownership structure. The model explains the heterogeneous tax sensitivity of firm-level investments. The empirical analysis uses a large firm database for 24 countries allowing for a quantification of the regime-specific investment responses to taxation and identifies the partly latent firm types using a threshold estimation approach. 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 substantially 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.

Keywords

Corporate tax
Personal taxes
Firm heterogeneity
Access to capital
Manager–shareholder conflicts

JEL classification

D22
G32
H25
L21
☆

We are grateful for valuable suggestions by two referees and the editor handling the paper (Joachim Winter). Keuschnigg appreciates financial support from the Swiss National Science Foundation (project no. 100018_146685). Egger also acknowledges funding by the Swiss National Science Foundation (project no. 100018_169537). We are grateful for comments by participants of the Tuebingen Workshop on Tax Policy and the Activities of Multinational Firms, the Transatlantic Public Economics Seminar in Vienna and, in particular, by our discussants Dominika Langenmayr and Harry Huizinga. Furthermore, we want to thank participants at the Doctoral Conference at the Centre for Business Taxation in Oxford and our discussant Michael Devereux.

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