Do corporate taxes reduce investments? Evidence from Italian firm-level panel data

This paper uses an Italian firm-level panel data-set over the period 1994–2006 to investigate the nexus between corporate taxation and investment. Studying the effects of corporate taxation on investment at the micro level has two advantages. Firstly, investment is free of aggregation biases and secondly, the firm-level dimension allows asking whether the effects of corporate taxation differ across firms with different characteristics. In the empirical analysis, we employ a Generalized Method of Moments estimator, which permits us to handle not only the dynamic structure of the model and of the predetermined or endogenous explanatory variables, but also firm-specific factors, heteroskedasticity, and autocorrelation of individual observations. We find that corporate taxes distort investment decisions. The results are robust to the inclusion of many controls.