Corporate flat tax reforms and businesses’ investment decisions: evidence from Switzerland

Article

Abstract

This paper focuses on the effects of a corporate income flat tax reform on businesses’ investment decisions. Since 1990, several Swiss states (cantons) have been switching from a graduated to a flat tax rate scheme on profits. The paper assesses the effects of such a reform both on the number of establishments (i.e. extensive margin of investment) and on the number of employees (i.e. intensive margin) in a given jurisdiction by computing a difference-in-differences estimation. Our results suggest that the introduction of a flat tax reform on corporate income taxes has a negative and statistically significant impact on both margins of investment. Moreover, the effect is considerably larger for riskier firms, suggesting that progressive taxation acts as an insurance effect for risk-averse entrepreneurs.

Keywords

Corporate taxes Flat tax Tax reform Progressive taxation 

JEL Classification

H25 H32 H71 R3 

References

  1. Altonji, J. G., Elder, T. E., & Taber, C. R. (2005). Selection on observed and unobserved variables: Assessing the effectiveness of catholic schools. Journal of Political Economy, 113(1), 151–184.CrossRefGoogle Scholar
  2. Atkinson, A. B. (1996). Public economics in action: The basic income/flat tax proposal. Oxford: OUP Catalogue, Oxford University Press.CrossRefGoogle Scholar
  3. Auerbach, A. J., & Slemrod, J. (1997). The economic effects of the Tax Reform Act of 1986. Journal of Economic Literature, 35(2), 589–632.Google Scholar
  4. Bacher, H., & Brülhart, M. (2013). Progressive taxes and firm births. International Tax and Public Finance, 20(1), 129–168.CrossRefGoogle Scholar
  5. Ballantine, J. W., Cleveland, F. W., & Timothy Koeller, C. (1993). Profitability, uncertainty, and firm size. Small Business Economics, 5(2), 87–100.CrossRefGoogle Scholar
  6. Barrios, S., Huizinga, H., Laeven, L., & Nicodème, G. (2012). International taxation and multinational firm location decisions. Journal of Public Economics, 96(11), 946–958.CrossRefGoogle Scholar
  7. Becker, S. O., Egger, P. H., & Merlo, V. (2012). How low business tax rates attract mne activity: Municipality-level evidence from Germany. Journal of Public Economics, 96(9–10), 698–711.CrossRefGoogle Scholar
  8. Brülhart, M., Jametti, M., & Schmidheiny, K. (2012). Do agglomeration economies reduce the sensitivity of firm location to tax differentials? Economic Journal, 122(563), 1069–1093.Google Scholar
  9. Brook, A.-M., & Leibfritz, W. (2005). Slovakia’s introduction of a flat tax as part of wider economic reforms. OECD Economics Department Working Papers 448, OECD Publishing.Google Scholar
  10. Cameron, A. C., & Miller, D. L. (2015). A practitioner’s guide to cluster-robust inference. Journal of Human Resources, 50(2), 317–372.CrossRefGoogle Scholar
  11. Cameron, A. C., Gelbach, J. B., & Miller, D. L. (2008). Bootstrap-based improvements for inference with clustered errors. The Review of Economics and Statistics, 90(3), 414–427.CrossRefGoogle Scholar
  12. Carey, D., Gordon, K., & Thalmann, P. (1999). Tax Reform in Switzerland. OECD Economics Department Working Papers 222, OECD Publishing.Google Scholar
  13. Cassou, S. P., & Lansing, K. J. (2004). Growth effects of shifting from a graduated-rate tax system to a flat tax. Economic Inquiry, 42(2), 194–213.CrossRefGoogle Scholar
  14. Cole, R. A., Goldberg, L. G., & White, L. J. (2004). Cookie cutter vs. character: The micro structure of small business lending by large and small banks. Journal of Financial and Quantitative Analysis, 39(02), 227–251.CrossRefGoogle Scholar
  15. Cullen, J. B., & Gordon, R. (2006). Tax reform and entrepreneurial activity. In J. M. Poterba (Ed.), Tax policy and the economy (Vol. 20, pp. 41–71). Cambridge: MIT Press.Google Scholar
  16. Cullen, J. B., & Gordon, R. H. (2007). Taxes and entrepreneurial risk-taking: Theory and evidence for the U.S. Journal of Public Economics, 91(7–8), 1479–1505.CrossRefGoogle Scholar
  17. Cummins, J. G., Hassett, K. A., & Glenn Hubbard, R. (1996). Tax reforms and investment: A cross-country comparison. Journal of Public Economics, 62(1–2), 237–273.CrossRefGoogle Scholar
  18. Da Rin, M., Di Giacomo, M., & Sembenelli, A. (2011). Entrepreneurship, firm entry, and the taxation of corporate income: Evidence from Europe. Journal of Public Economics, 95(9–10), 1048–1066.CrossRefGoogle Scholar
  19. Davies, J. B., & Hoy, M. (2002). Flat rate taxes and inequality measurement. Journal of Public Economics, 84(1), 33–46.CrossRefGoogle Scholar
  20. Devereux, M. P., & Griffith, R. (1998). Taxes and the location of production: Evidence from a panel of us multinationals. Journal of Public Economics, 68(3), 335–367.CrossRefGoogle Scholar
  21. Devereux, M. P., & Griffith, R. (2003). Evaluating tax policy for location decisions. International Tax and Public Finance, 10(2), 107–126.CrossRefGoogle Scholar
  22. Diamond, P., & Saez, E. (2011). The case for a progressive tax: From basic research to policy recommendations. Journal of Economic Perspectives, 25(4), 165–190.CrossRefGoogle Scholar
  23. Dunbar, A., & Pogue, T. F. (1998). Estimating flat tax incidence and yield: A sensitivity analysis. National Tax Journal, 51(2), 303–24.Google Scholar
  24. Feld, L. P., & Kirchgässner, G. (2003). The impact of corporate and personal income taxes on the location of firms and on employment: Some panel evidence for the Swiss cantons. Journal of Public Economics, 87(1), 129–155.CrossRefGoogle Scholar
  25. Feldstein, M. (1995). The effect of marginal tax rates on taxable income: A panel study of the 1986 Tax Reform Act. Journal of Political Economy, 103(3), 551–572.CrossRefGoogle Scholar
  26. Gorodnichenko, Y., Martinez-Vazquez, J., & Peter, K. S. (2009). Myth and reality of flat tax reform: Micro estimates of tax evasion response and welfare effects in Russia. Journal of Political Economy, 117(3), 504–554.CrossRefGoogle Scholar
  27. Hall, R. E., & Rabushka, A. (1984). Low tax, simple tax, flat tax. Eastern Economic Journal, 10(3), 337–340.Google Scholar
  28. Hall, R. E., & Rabushka, A. (1987). The flat tax. Journal of Policy Analysis and Management, 5(3), 598–607.Google Scholar
  29. Hemming, R., & Keen, M. J. (1983). Single-crossing conditions in comparisons of tax progressivity. Journal of Public Economics, 20(3), 373–380.CrossRefGoogle Scholar
  30. Jenkins, S. P. (1995). Easy estimation methods for discrete–time duration models. Oxford Bulletin of Economics and Statistics, 57(1), 129–138.CrossRefGoogle Scholar
  31. Johannesen, N. (2014). Tax avoidance with cross-border hybrid instruments. Journal of Public Economics, 112, 40–52.CrossRefGoogle Scholar
  32. Keen, M., Kim, Y., & Varsano, R. (2008). The “flat tax(es)”: Principles and experience. International Tax and Public Finance, 15(6), 712–751.CrossRefGoogle Scholar
  33. Kneller, R., & McGowan, D. (2012). Tax policy and firm entry and exit dynamics: Evidence from OECD countries. Working Papers 12006, Bangor Business School, Prifysgol Bangor University, Cymru/Wales.Google Scholar
  34. Lawless, M. (2013). Do complicated tax systems prevent foreign direct investment? Economica, 80(317), 1–22.CrossRefGoogle Scholar
  35. Miller, M. (1977). Debt and taxes. Journal of Finance, 32(2), 261–75.Google Scholar
  36. Mills, K., & McCarthy, B. (2014). The state of small business lending: Credit access during the recovery and how technology may change the game. Harvard Business School Working Papers 15-004, Harvard Business School.Google Scholar
  37. Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital: A correction. American Economic Review, 53(3), 433–443.Google Scholar
  38. Mooij, R., & Nicodème, G. (2008). Corporate tax policy and incorporation in the EU. International Tax and Public Finance, 15(4), 478–498.CrossRefGoogle Scholar
  39. Moore, D. (2005). Slovakia’s 2004 tax and welfare reforms. IMF Working Papers 05/133, International Monetary Fund.Google Scholar
  40. OECD. (2013) Action plan on base erosion and profit shifting. Technical Report, OECD Publishing.Google Scholar
  41. OECD. (2015). Taxation of SMEs in OECD and G20 countries. OECD Tax Policy Studies 23, OECD Publishing.Google Scholar
  42. Parchet, R. (2014). Are local tax rates strategic complements or strategic substitutes? IdEP Economic Papers 1407, USI Università della Svizzera italiana.Google Scholar
  43. Paulus, A., & Peichl, A. (2009). Effects of flat tax reforms in Western Europe. Journal of Policy Modeling, 31(5), 620–636.CrossRefGoogle Scholar
  44. Da Rin, M., Di Giacomo, M., & Sembenelli, A. (2010). Corporate taxation and the size of new firms: Evidence from Europe. Journal of the European Economic Association, 8(2–3), 606–616.CrossRefGoogle Scholar
  45. Slemrod, J., & Bakija, J. (2008). Taxing ourselves, 4th edition: A citizen’s guide to the debate over Taxes, Vol. 1 of MIT Press Books. The MIT Press.Google Scholar
  46. Stiglitz, J. E., & Weiss, A. (1981). Credit rationing in markets with imperfect information. American Economic Review, 71(3), 393–410.Google Scholar
  47. Wilson, J. D. (1999). Theories of tax competition. National Tax Journal, 52(2), 269–304.Google Scholar

Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.Institute of Economics (IdEP)University of LuganoLuganoSwitzerland
  2. 2.Council on Economic Policies (CEP)ZurichSwitzerland
  3. 3.Barcelona Institute of Economics (IEB)University of BarcelonaBarcelonaSpain

Personalised recommendations