Homogeneous Profit Tax Effects for Heterogeneous Firms?

Egger, Peter and Loretz, Simon (2010) Homogeneous Profit Tax Effects for Heterogeneous Firms? The World Economy, 33 (8). pp. 1023-1041.

Abstract

In most countries, profit taxation is probably much more relevant nowadays than trade liberalisation when it comes to firm-level decisions about investment. Empirically, firms are quite heterogeneous with regard to fixed costs: the composition of assets (tangible versus intangible; machinery versus buildings; etc.) and the financing of investments. Then, even uniform changes in profit tax instruments cause heterogeneous responses of firm-level effective tax rates and, hence, after-tax profits. We argue that, with similar profit margins, firms would then require pre-tax profits to differ as well. Governments change statutory profit tax rates and, by virtue of firms’ heterogeneity, they cause stark selection effects which are mainly related to heterogeneous fixed rather than variable costs. We compute costs of capital for a large sample of firms to illustrate how homogeneous changes in tax instruments hit firms differently. Using Bureau van Dijk’s ORBIS database, we illustrate that the effects of changes in statutory instruments have relatively large systematic variance components across industries within countries and also relatively large ones of firms within industries and countries.

Item Type: Article
Keywords: Corporate profits; Taxation; Free trade; Equalibrium; Investments; Tax rates & tables; Commercial policy; Developed countries
Subject(s): Taxation
Centre: Oxford University Centre for Business Taxation
Date Deposited: 24 Apr 2012 13:46
Last Modified: 23 Oct 2015 14:07
URI: http://eureka.sbs.ox.ac.uk/id/eprint/3433

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