DP5769 Exports, Foreign Direct Investment and the Costs of Coporate Taxation

Author(s): Christian Keuschnigg
Publication Date: August 2006
Keyword(s): corporate taxation, costs of public funds, exports, foreign direct investment
JEL(s): D21, F23, H25, L11, L22
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5769

Depending on the definition of the tax base, the statutory corporate tax rate implies rather different measures of effective average and marginal tax rates. This paper develops a model of a monopolistically competitive industry with extensive and intensive business investment and shows how these margins respond to changes in average and marginal corporate tax rates. Intensive investment refers to the size of a firm's capital stock. Extensive investment refers to the firm's production location and reflects the trade-off between exports and foreign direct investment as alternative modes of foreign market access. The paper derives comparative static effects of the corporate tax and shows how the cost of public funds depends on the elasticities of the extensive and intensive investment responses.