Corporate Taxes Reduce Investment: New Evidence from Germany

A new EconPol Policy Brief shows that in Germany, higher corporate taxes lead to a decline in private investment: a one percentage point increase in corporate taxes is associated with a cut in firm investment of around three percent.  This means that each additional Euro of tax revenues comes at the cost of a decrease in firm investment of more than two Euro. If taxes are increased during a recession, the magnitude of the investment response is twice as large. The authors conclude that fiscal policy should therefore avoid higher corporate taxation in times of economic crisis. Moreover, theresults have implications for the optimal design of fiscal federalism in Germany. Strong dependencies of municipalities on local business tax revenues should be avoided, as they can be very harmful during recessions.