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Is the Corporation Tax an Effective Automatic Stabilizer?

Devereux, Michael P. and Fuest, Clemens

Abstract:

We investigate the extent to which the corporation tax can act as an automatic stabilizer by smoothing the effects on investment of shocks to income. The main stabilizing effect would be through a reduced tax liability affecting the internal funds available for investment by credit-constrained companies. We present evidence for the United Kingdom that most credit-constrained firms have also been likely to be in a tax loss-making position, implying that the tax does not smooth investment, and thus is not an effective automatic stabilizer. A more generous treatment of tax losses would introduce significantly more automatic stabilization.

Citation

Devereux, Michael P. and Fuest, Clemens (2009), Is the Corporation Tax an Effective Automatic Stabilizer?, National Tax Journal, 62:3, pp. 429-37

DOI: dx.doi.org/10.17310/ntj.2009.3.05