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Corporate Taxes Reduce Investment: New Evidence from Germany

Author

Listed:
  • Sebastian Link
  • Manuel Menkhoff
  • Andreas Peichl
  • Paul Schüle

Abstract

This policy brief provides novel empirical evidence on the causal effect of increasing corporate taxes on firm investment. The study combines unique data on investment plans and their realizations of firms in the German industrial sector and data on more than 1,400 local tax changes in the specific system of business taxation in Germany. We show that firms reduce their investments if corporate taxes were increased. An increase of corporate tax rates to stabilize fiscal revenues would be especially costly during recessions. We conclude that fiscal policy should therefore avoid higher corporate taxation in times of economic crisis. Moreover, our results have implications for the op-timal design of fiscal federalism in Germany. Strong dependencies of municipalities on local business tax revenues should be avoided, as they can be very harmful during recessions.

Suggested Citation

  • Sebastian Link & Manuel Menkhoff & Andreas Peichl & Paul Schüle, 2022. "Corporate Taxes Reduce Investment: New Evidence from Germany," EconPol Policy Brief 44, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    • Handle: RePEc:ces:econpb:_44
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    File URL: https://www.ifo.de/DocDL/EconPol-PolicyBrief_44.pdf
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    References listed on IDEAS

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    1. Ayaz, Mehmet & Fricke, Lea & Fuest, Clemens & Sachs, Dominik, 2023. "Who should bear the burden of COVID-19 related fiscal pressure? An optimal income taxation perspective," European Economic Review, Elsevier, vol. 153(C).
    2. Sebastian Link & Manuel Menkhoff & Andreas Peichl & Paul Schüle, 2024. "Downward Revision of Investment Decisions after Corporate Tax Hikes," American Economic Journal: Economic Policy, American Economic Association, vol. 16(4), pages 194-222, November.
    3. Eric Zwick & James Mahon, 2017. "Tax Policy and Heterogeneous Investment Behavior," American Economic Review, American Economic Association, vol. 107(1), pages 217-248, January.
    4. E. Mark Curtis & Daniel G. Garrett & Eric C. Ohrn & Kevin A. Roberts & Juan Carlos Suárez Serrato, 2021. "Capital Investment and Labor Demand," NBER Working Papers 29485, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Aria Ardalan & Sebastian G. Kessing & Salmai Qari & Malte Zoubek, 2023. "Does capital bear the burden of local corporate taxes? Evidence from Germany," Volkswirtschaftliche Diskussionsbeiträge 194-23, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
    2. Riedel Nadine & Simmler Martin, 2024. "Fiskalföderalismus in Deutschland – Was zu tun ist," Wirtschaftsdienst, Sciendo, vol. 104(11), pages 747-753.

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