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Do corporate taxes distort capital allocation? Cross-country evidence from industry-level data

Author(s): Serena Fatica

Do corporate taxes distort capital allocation? Cross-country evidence from industry-level datapdf(592 kB) Choose translations of the previous link  

Summary for non-specialistspdf(41 kB) Choose translations of the previous link 

The working paper investigates the impacts of corporate taxes on the accumulation of different types of capital assets.

The paper analyses the effect of corporate taxes on new investment in different types of capital assets in the manufacturing industries of 11 advanced economies over the period 1991-2007. The magnitude of the asset substitution elasticities points to a significant inter-asset distortionary effect induced by differences in the tax-adjusted user cost of capital. Overall, differential taxation leads on average to under-investment in ICT capital and to over-investment in other machinery and equipment compared to a counterfactual benchmark where marginal tax rates are equalized across assets. Once cross-country heterogeneity in corporate taxation is accounted for, the results are more mixed, in terms of both the size and the direction of the distortions. On average, 4 percent of the aggregate capital stock appears misallocated.

(European Economy. Economic Papers 503. September 2013. Brussels. PDF. 34pp. Tab. Bibliogr. Free.)

KC-AI-13-503-EN-N (online)
ISBN 978-92-79-32330-0 (online)
doi: 10.2765/54597 (online)

Economic Papers are written by the staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The Papers are intended to increase awareness of the technical work being done by staff and to seek comments and suggestions for further analysis. The views expressed are the author’s alone and do not necessarily correspond to those of the European Commission.

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