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Do corporate taxes reduce investments? Evidence from Italian firm-level panel data

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  • Daniela Federici
  • Valentino Parisi
  • Caroline Elliott

Abstract

This paper uses an Italian firm-level panel data-set over the period 1994–2006 to investigate the nexus between corporate taxation and investment. Studying the effects of corporate taxation on investment at the micro level has two advantages. Firstly, investment is free of aggregation biases and secondly, the firm-level dimension allows asking whether the effects of corporate taxation differ across firms with different characteristics. In the empirical analysis, we employ a Generalized Method of Moments estimator, which permits us to handle not only the dynamic structure of the model and of the predetermined or endogenous explanatory variables, but also firm-specific factors, heteroskedasticity, and autocorrelation of individual observations. We find that corporate taxes distort investment decisions. The results are robust to the inclusion of many controls.

Suggested Citation

  • Daniela Federici & Valentino Parisi & Caroline Elliott, 2015. "Do corporate taxes reduce investments? Evidence from Italian firm-level panel data," Cogent Economics & Finance, Taylor & Francis Journals, vol. 3(1), pages 1012435-101, December.
    • Handle: RePEc:taf:oaefxx:v:3:y:2015:i:1:p:1012435
    DOI: 10.1080/23322039.2015.1012435
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    2. Cordelia O. Omodero, 2022. "Assessment of the Impact of Direct Taxes on Public Investment in Agriculture in Nigeria," Journal of Applied Economic Research, Graduate School of Economics and Management, Ural Federal University, vol. 21(1), pages 6-20.
    3. Jack Mintz & Patrick Smith & V. Balaji Venkatachalam, 2021. "A New Approach to Improving Small-Business Tax Competitiveness," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 14(24), October.
    4. Kayis-Kumar, Ann, 2015. "Taxing cross-border intercompany transactions: are financing activities fungible?," MPRA Paper 71615, University Library of Munich, Germany.
    5. Ernesto Zangari, 2020. "An economic assessment of the evolution of the corporate tax system in Italy," Temi di discussione (Economic working papers) 1291, Bank of Italy, Economic Research and International Relations Area.
    6. Siedschlag, Iulia & McLoughlin, Robert & Daire De Hora, 2023. "The impact of the global tax reforms on Ireland’s corporate investment and the wider economy," Papers WP761, Economic and Social Research Institute (ESRI).
    7. Kayis-Kumar, Ann, 2015. "Thin capitalisation rules: A second-best solution to the cross-border debt bias?," MPRA Paper 72031, University Library of Munich, Germany.
    8. Thanh, Su Dinh & Canh, Nguyen Phuc, 2020. "Taxation and capital formation: Non-linear effects and asymmetry between developing and developed countries," The Journal of Economic Asymmetries, Elsevier, vol. 22(C).

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