International Tax and Public Finance

, Volume 17, Issue 6, pp 686–698 | Cite as

The role of the corporate income tax as an automatic stabilizer

Article

Abstract

This paper analyses the effectiveness of the corporate income tax as an automatic stabilizer. It employs a unique firm-level data set of German manufacturers combining financial statements with firm-specific information about credit market restrictions. The results show that approximately 20 per cent of all firms report both positive taxable income and capital market restrictions. Taking account of the income tax rates and the size differences of the firms, we find that demand stabilization through the corporate income tax amounts to about 8 per cent of an initial shock to gross revenues. This stabilization effect varies over the business cycle and tends to increase during cyclical downturns.

Keywords

Corporate income tax Stabilization Capital market restrictions Loss offset Firm-level data 

JEL Classification

H25 H32 E63 

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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.Ifo Institute for Economic ResearchMunichGermany
  2. 2.Centre for Business Taxation, Saïd Business SchoolUniversity of OxfordOxfordUK

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