The Effect of Corporate Taxation on Investment and Financial Policy: Evidence from the DPAD

Abstract

This study estimates the investment, financing, and payout responses to variation in a firm's effective corporate income tax rate in the United States. I exploit quasi-experimental variation created by the Domestic Production Activities Deduction, a corporate tax expenditure created in 2005. A 1 percentage point reduction in tax rates increases investment by 4.7 percent of installed capital, increases payouts by 0.3 percent of sales, and decreases debt by 5.3 percent of total assets. These estimates suggest that lower corporate tax rates and faster accelerated depreciation each stimulate a similar increase in investment, per dollar in lost revenue. (JEL D22, D25, G31, G32, H25, H32)

Do income taxes affect corporate social responsibility? Evidence from European‐listed companies

“…According to the literature that finds adverse effects of corporate income taxes on investment (Djankov et al, 2010;Hassett & Glenn, 2002;Hassett & Hubbard, 2002;Ohrn, 2018), our prediction is that corporate taxes can discourage socially responsible activities, reflected by CSR ratings. The recent literature on CSR investments (Soytas, Denizel, & Usar, 2019) casts doubt on the possibility of endogeneity problems between CSR and the firm's financial performance.…”

How Should Business Profit Be Taxed? Some Thoughts on Conceptual Developments During the Lifetime of the IFS*

“…31 See, for example, the recommendations of the OECD in its BEPS Action 4 (OECD, 2015a). 32 For recent evidence, see Zwick and Mahon (2017), Ohrn (2018) and Maffini, Xing and Devereux (2019). 33 For recent evidence, see Faccio and Xu (2015) and Devereux, Maffini and Xing (2018), and for a meta-study, see Feld, Heckemeyer and Overesch (2013).…”

The Effects of Corporate Taxes on Small Firms

“…These reforms have reduced the cost of capital and relaxed the financial constraints of firms, creating incentives for new investments and increased business activity. This development has also prompted researchers to study the effects of these reforms using quasi-experimental methods and administrative data, focusing mostly on investment responses and the incidence of corporate taxes (Yagan 2015;Bond and Xing 2015;Suarez Serrato and Zidar 2016;Zwick and Mahon 2017;Ohrn 2018;Fuest et al 2018;Maffini et al 2019;Liu and Mao 2019;Ohrn 2019).…”

“…This branch of literature commonly estimates very large investment responses. For example, Ohrn [2018] uses changes in deduction regulation in the US and finds a large investment response and an implied elasticity of investments of 6.5. House and Shapiro [2008] and Zwick and Mahon [2017] use changes in depreciation rules in the US and find significant investment responses and very large investment elasticities, 7.7 and 7.2, respectively.…”