Dynamic Effects Of Corporate Taxation In Open Economy

By exploiting the downward trend of OECD countries profits’ taxation rooted into international competition to attract capital, we identify exogenous variations in corporate income taxes. Our SVAR-based evidence reveals that a permanent decline in profits’ taxation leads to significant technology improvements which are concentrated in traded industries and generates an expansionary effect on hours which is concentrated in the non-traded sector. While technology dramatically improves in English-speaking and Scandinavian countries, hours significantly increase in continental Europe. A twosector open economy model with endogenous technology decisions can rationalize the evidence conditional on a set of elements which characterize households’ preferences and firms’ ability to improve technology. In line with our estimates, traded technology must display a high elasticity w.r.t. both the domestic and international stock of knowledge in former countries while the weight attached to consumption habits along with wage stickiness shape the expansionary effect on nontradable hours in continental Europe.