Higher Corporate Taxes Lead to a Decline in Private Investment

Higher corporate taxes lead to a decline in private investment in Germany, shows a study conducted by the EconPol research network. A 1 percentage point increase in local business tax leads to a 3 percent decrease in investment activity. “This means that every additional euro of tax revenue would cause companies to invest two euros less on average,” says Andreas Peichl, Director of the ifo Center for Macroeconomics and Surveys.

Companies’ investment decisions vary depending on the economic situation. In normal economic times, the share of companies that adjust their investment decisions downward in response to tax increases rises by 2 percentage points. During a recession, this figure triples to over 6 percentage points. “In view of the forgone investments, it would therefore be particularly costly for policymakers to increase corporate tax rates as a way to stabilize tax revenue in turbulent economic times such as the current crisis,” Peichl says.

The basis for measuring corporate investment is the ifo Investment Survey, a representative survey of corporations in Germany’s manufacturing sector. Overall, the analysis is based on 1,436 business tax increases in 797 German municipalities spread over the period 1980–2018.