International Tax and Public Finance

, Volume 20, Issue 3, pp 513–543 | Cite as

Investment impact of tax loss treatment—empirical insights from a panel of multinationals

Article

Abstract

We analyze the impact of tax loss treatment on multinational investment. Basically, two effects of tax loss treatment can be expected. First, firms make their investment decisions considering potential future losses. Then, the various types of conceivable loss offset provisions affect investment decisions. Secondly, existing loss carryforwards resulting from losses in the past affect the tax rate elasticity of current investment decisions. Our empirical analysis is based on data of German multinationals. We pay particular attention to industries having a high probability to make losses. Our regression results suggest that a short carryforward time limit lowers investment in particular for firms with a high loss probability. We only find mixed evidence that group loss offsetting provisions foster investment. Concerning the effects of existing losses carried forward, we find a reduced tax rate elasticity of investment for companies shielded by loss carryforwards.

Keywords

Corporate taxation Loss treatment Group taxation Multinational firms Empirical analysis 

JEL Classification

F23 H25 H32 

References

  1. Alvarez, L., & Koskela, E. (2008). Progressive taxation, tax exemption, and irreversible investment under uncertainty. Journal of Public Economic Theory, 10(1), 149–169. CrossRefGoogle Scholar
  2. Anderson, T., & Hsiao, C. (1982). Formulation and estimation of dynamic models using panel data. Journal of Econometrics, 18(1), 47–82. CrossRefGoogle Scholar
  3. Altshuler, R., Auerbach, A. J., Cooper, M., & Knittel, M. (2008). Understanding U.S. corporate tax losses (NBER Working Paper No. 14405). Google Scholar
  4. Auerbach, A. J. (1986). The dynamic effects of tax law asymmetries. Review of Economic Studies, 53(2), 205–225. CrossRefGoogle Scholar
  5. Auerbach, A. J., & Poterba, J. M. (1987). Tax loss carryforwards and corporate tax incentives. In M. Feldstein (Ed.), The effects of taxation on capital accumulation (pp. 305–342). Chicago: University of Chicago Press. Google Scholar
  6. Barlev, B., & Levy, H. (1975). Loss carryback and carryover provision: effectiveness and economic implications. National Tax Journal, 28(2), 173–184. Google Scholar
  7. Bertrand, M., Duflo, E., & Mullainathan, S. (2004). How much should we trust differences-in-differences estimates? Quarterly Journal of Economics, 119(1), 249–275. CrossRefGoogle Scholar
  8. Buettner, T., & Fuest, C. (2010). The role of the corporate income tax as an automatic stabilizer. International Tax and Public Finance, 17(6), 686–698. CrossRefGoogle Scholar
  9. Chirinko, R. S. (1993). Business fixed investment spending: modelling strategies, empirical results, and policy implications. Journal of Economic Literature, 31(4), 1875–1911. Google Scholar
  10. Cooper, M., & Knittel, M. (2006). Partial loss refundability: how are corporate tax losses used? National Tax Journal, 59(3), 651–663. Google Scholar
  11. Cooper, M., & Knittel, M. (2010). The implications of tax asymmetry for U.S. corporations. National Tax Journal, 63(1), 33–62. Google Scholar
  12. Creedy, J., & Gemmell, N. (2008). Behavioural responses to corporate profit taxation (The Treasury Research Paper No. 1029). New Zealand: The University of Melbourne. Google Scholar
  13. De Mooij, R. A., & Ederveen, S. (2003). Taxation and foreign direct investment: a synthesis of empirical research. International Tax and Public Finance, 10(6), 673–693. CrossRefGoogle Scholar
  14. Devereux, M. P. (1989). Tax asymmetries, the cost of capital and investment: some evidence from united kingdom panel data. Economic Journal, 99, 103–112. CrossRefGoogle Scholar
  15. Devereux, M. P., Keen, M., & Schiantarelli, F. (1994). Corporation tax asymmetries and investment. Journal of Public Economics, 53(3), 395–418. CrossRefGoogle Scholar
  16. Devereux, M. P., & Fuest, C. (2009). Is the corporate tax an effective automatic stabilizer? National Tax Journal, 62(3), 429–437. Google Scholar
  17. Domar, E. D., & Musgrave, R. A. (1944). Proportional income taxation and risk-taking. Quarterly Journal of Economics, 58(3), 388–422. CrossRefGoogle Scholar
  18. Donnelly, M., & Young, A. (2002). Policy options for tax loss treatment: how does Canada compare? Canadian Tax Journal, 50(2), 429–488. Google Scholar
  19. Edgerton, J. (2010). Investment incentives and corporate tax asymmetries. Journal of Public Economics, 94(11–12), 936–952. CrossRefGoogle Scholar
  20. Eeckhoudt, L., Gollier, C., & Schlesinger, H. (1997). The no-loss offset provision and the attitude towards risk of a risk-neutral firm. Journal of Public Economics, 65(2), 207–217. CrossRefGoogle Scholar
  21. European Commission (2011). Proposal for a Council Directive on a Common Consolidated Corporate Tax Base (CCCTB), COM(2011) 121/4. Brussels. Google Scholar
  22. Lipponer, A. (2008). Microdatabase direct Investment-MiDi. A brief guide. Frankfurt: Economic Research Centre, Deutsche Bundesbank. Google Scholar
  23. MacKie-Mason, J. K. (1990). Some nonlinear tax effects on asset values and investment decisions under uncertainty. Journal of Public Economics, 42(3), 301–327. CrossRefGoogle Scholar
  24. Majd, S., & Myers, S. C. (1987). Tax asymmetries and corporate tax reform. In M. Feldstein (Ed.), The effects of taxation on capital accumulation (pp. 343–376). Chicago: University of Chicago Press. Google Scholar
  25. Mintz, J. M. (1981). Some additional results on investment, risk taking, and full loss offset corporate taxation with interest deductibility. Quarterly Journal of Economics, 96(4), 631–642. CrossRefGoogle Scholar
  26. Mintz, J. M. (2004). Conduit entities: implications of indirect tax-efficient financing structures for real investment. International Tax and Public Finance, 11(4), 419–434. CrossRefGoogle Scholar
  27. Mintz, J., & Weichenrieder, A. (2010). The indirect side of direct investment—multinational company finance and taxation. Cambridge: MIT Press. Google Scholar
  28. Mossin, J. (1968). Taxation and risk-taking: an expected utility approach. Economica, 35(1), 74–82. CrossRefGoogle Scholar
  29. Moulton, B. R. (1990). An illustration of a pitfall in estimating the effects of aggregate variables on micro units. Review of Economics and Statistics, 72(2), 334–338. CrossRefGoogle Scholar
  30. Nickell, S. J. (1981). Biases in dynamic models with fixed effects. Econometrica, 49(6), 1417–1426. CrossRefGoogle Scholar
  31. Niemann, R. (2008). The effects of differential taxation on managerial effort and risk taking. Finanzarchiv, 64(3), 273–310. CrossRefGoogle Scholar
  32. Wamser, G. (2011). Foreign (in)direct investment and corporate taxation. Canadian Journal of Economics, 44(4), 1497–1524. CrossRefGoogle Scholar
  33. Wooldridge, J. M. (2002). Econometric analysis of cross section and panel data. Cambridge: MIT Press. Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  1. 1.Centre for European Economic Research (ZEW)MannheimGermany
  2. 2.Department for Business Administration and Economics, Westend CampusGoethe University FrankfurtFrankfurtGermany

Personalised recommendations