Differential Taxation and Firms' Financial Leverage: Evidence from the Introduction of a Flat Tax on Interest Income

Tax competition for the mobile factor capital has led to a trend in many countries to levy lower taxes on interest income, often introducing differential taxation between interest and business income. In this study, we analyze the effect of such differential taxation on the debt ratio of firms. We exploit a 2009 tax reform in Germany as a quasi-experiment, which introduced a flat final withholding tax and opened a gap of 18 percentage points between the tax rate on income from unincorporated businesses and the new lower tax rate on interest income. We apply a regression adjusted semi-parametric difference-in-difference matching strategy based on firm level panel data. In addition, we implement a more structural approach with a tax rate differential, taking into account its endogeneity by using instrumental variables. The results indicate that firms increase their leverage when the tax rate on interest income decreases, albeit to a small degree.Income taxation, capital taxation, financial structure, leverage, matching

How do taxes affect investment when firms face financial constraints?

This study uses a switching regression framework with known sample separation to analyze the effects of corporate income taxation on investment in case of binding and non-binding financial constraints. By employing two different sample splitting criteria, payout behavior and the ratio of liabilities to total assets, I show that the elasticity of capital to its user costs in an auto-distributed-lag model is underestimated in case of neglecting the presence of financial constraints. For unconstrained firms, the elasticity of capital to its user costs is around -1. For financially constrained firms the elasticity is statistically not different from zero. For the latter group instead, the results prevail by using the effective average tax rate to measure liquidity outflow through taxation that corporate taxation affects investment through changing internal finance. In addition, this study helps to understand the methodological differences between auto-distributed-lag and error-correction models

Do multinational firms invest more? On the impact of internal debt financing and transfer pricing on capital accumulation.

This study analyses whether multinational companies (MNCs) that are able to reduce their tax burden on capital by shifting profits to low tax jurisdictions invest more than domestic firms. To study the relationship, I exploit a massive corporate tax rate cut of 10%-points in Germany 2008 as a quasi-natural experiment. This reform reduced substantially the incentive of MNC to engage in profit shifting. Using a difference in differences matching strategy (DiD), the results suggest that MNCs decreased their fraction of internal borrowing and their capital stock compared to purely domestic firms. Taking the evidence together, the findings suggest that if MNCs shift profits abroad, their capital accumulation is less depressed by the national tax rate and, therefore, benefits less from a tax rate reduction. The DiD results are confirmed by a more structural approach, which exploits variation in the tax incentive to shift profits to the headquarters for identification. Further, the results suggest that only internal debt financing but not transfer pricing fosters capital accumulation

On the incidence of renewable energy subsidies into land prices - Evidence from Germany

In 2012, the subsidy for electricity produced by wind turbines - introduced with the Renewable Energy Act (REA) in Germany 2000 - amounts to almost 14 billion Euros or roughly 100% of the corporate income tax revenue. The central aim of this subsidy is to foster investment into renewable energy sources by providing long run financial security. In this analysis, we study the incidence of this subsidy on land prices. Our empirical design exploits variation over time in the return of wind turbines due to the introduction of the REA and relates it to changes in transaction prices for agricultural land for 250 non-urban counties between 1997 and 2012. We employ an instrumental variable estimator to ensure unbiased coefficients despite the endogeneity of the plants' location decision. We find that 11% of the subsidy paid to wind turbine investors is capitalized into land prices. Accounting for investor's costs, the share raises to 24% of investor's profits. The results are robust for a wide range of specifications

Differential taxation and firms’ financial leverage - Evidence from the introduction of a flat tax on interest income

Tax competition for the mobile factor capital has led to a trend in many countries to levy lower taxes on interest income, often introducing differential taxation between interest and business income. In this study, we analyze the effect of such differential taxation on the debt ratio of firms. We exploit a 2009 tax reform in Germany as a quasi-experiment, which introduced a flat final withholding tax and opened a gap of 18 percentage points between the tax rate on income from unincorporated businesses and the new lower tax rate on interest income. We apply a regression adjusted semi- parametric difference-in-difference matching strategy based on firm level panel data. In addition, we implement a more structural approach with a tax rate differential, taking into account its endogeneity by using instrumental variables. The results indicate that firms increase their leverage when the tax rate on interest income decreases, albeit to a small degree

Gemeindefinanzreform gescheitert: warum sich die Kommunen querlegen

Die jüngsten Bemühungen zur Reform der Gemeindefinanzierung sind gescheitert. Die von der Bundesregierung vorgeschlagene kommunale Zuschlagsteuer auf Einkommen- und Körperschaftsteuer wird von den Kommunen abgelehnt. Die Gewerbesteuer bleibt erhalten. Ein Blick auf die kommunale Einnahmeseite verrät die Gründe. Im geltenden Recht sorgt nur der Einkommensteueranteil der Gemeinden für eine gleichmäßige Verteilung der kommunalen Steuereinnahmen. Mit der Einführung einer kommunalen Zuschlagsteuer auf die örtlich festgesetzte Einkommensteuer würde die bestehende Ungleichverteilung weiter verstärkt. Das gilt auch für die von der Bundesregierung vorgeschlagene Erhöhung des Umsatzsteueranteils der Gemeinden. Wesentliche Mängel des bestehenden Systems - ungleichmäßige Verteilung und Volatilität der Gewerbesteuereinnahmen - würden durch den Reformvorschlag der Bundesregierung wohl nicht wesentlich entschärft werden. Es gibt aber Möglichkeiten, die Eigenverantwortlichkeit der Gemeinden (fiskalische Äquivalenz) und eine angemessene kommunale Finanzausstattung gleichermaßen zu stärken. Vorgeschlagen wird eine aufkommensneutrale kommunale Umsatzsteuerzuweisung pro Einwohner, die die erhöhte Ungleichverteilung bei einer Zuschlagsteuer ausgleicht, stabile Einnahmen generiert und die richtigen wirtschaftlichen Anreize setzt

How cost-effective is public R&D in stimulating firm innovation?

This paper assesses the impact of public R&D on firm R&D using patent application data on the county and firm level in Germany. We address the endogeneity of public R&D by employing an instrumental variable estimator that uses lagged institutional funding for research institutes and universities as excluded instruments. We find that one additional public patent application generates 3.5 firm patent applications in the median county, but also that the relationship turns negative for high levels of public R&D. We estimate the public costs per firm patent to be between 0.8 and 1.5 million EURO

Kampf gegen Gewinnverlagerung: Wie haben Unternehmen auf die Zinsschranke reagiert?

Deutschland besitzt seit 1994 eine Regelung, die der Gewinnverlagerung multinationaler Konzerne mittels interner Fremdfinanzierung einen Riegel vorschieben soll. Trotz Nachbesserungen in den Jahren 2001 und 2004 war diese nach den bisherigen empirischen Untersuchungen wenig effektiv und beinhaltete Umsetzungsschwierigkeiten. Im Rahmen der Unternehmensteuerreform 2008 hat der Gesetzgeber sich daher für ein neues Design entschieden. Die neue Regelung betrifft im Gegensatz zur alten nicht nur Zinszahlungen an Gesellschafter, sondern alle Zinszahlungen unabhängig vom Kreditgeber. In einer Studie des DIW Berlin wurde untersucht, wie effektiv die neue Regelung ist. Es zeigt sich, dass Unternehmen, die von der Zinsschranke potenziell betroffen waren, ihren Verschuldungsgrad reduzieren. Die ausgewiesenen Gewinne steigen für potenziell betroffene Unternehmen als Folge der geänderten Finanzierungsstruktur