Policymakers widely use tax-based incentives to spur investment and stimulate economic growth. Tax policy has been at the center of emergency measures during the Covid-19 pandemic, and it is now as countries face a significant deterioration in public finances. Yet, empirical tax research is still in disagreement on how taxes affect business investment. We investigate the effect of local business tax (LBT) rates on real business investment at the extensive and intensive margin. Unlike most prior studies using aggregate country or accounting data, we rely on a detailed and mandatory investment survey at the establishment level collected for an administrative panel of all German manufacturing establishments (about 43,000 per year). Drawing on 10,702 LBT rate changes from 1995 to 2016 and using an event study approach, we find no significant average investment responses, neither at the extensive nor the intensive margin. Taking account of firm and investment types uncovers substantial heterogeneity in responses.
Joint work of Charlotte Bartels, Sebastian Eichfelder, Jonas Knaisch, and Carla Pöschel.
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