Working papers

Dynamics of Financing Frictions for Investment in R&D

Measurement and identification issues constitute a challenge in our understanding of the extent of financing constraints as a barrier to investment and innovation. Governments try to alleviate liquidity constraints of innovative firms by providing a range of support schemes, but there is limited evidence on their effectiveness. A special UK policy provides new insights and offers the possibility of carrying out counterfactual policy experiments in a setting with small and medium sized innovating firms that face financing constraints. Firms are offered incentives for R&D, giving loss-makers a choice between taking a cash injection from the government immediately or when they become profitable in the future. Claiming the cash immediately comes at a cost; the rate at which the government pays cash to loss-making firms is significantly lower than a future deduction. Different choices made by the firms are informative about heterogeneities in financing constraints and productivity across firms. The exogenous variation across firms and over time in deduction rates and the availability of the cash option identifies the effects of policy changes on cash flow, and consequently, outcomes of interest such as R&D investment and output.

(formerly "Quantifying and Alleviating Financing Constraints: Structural Evidence from a Policy Experiment")

Optimization Frictions and the Fixed Cost of Profit Shifting

with Katarzyna Bilicka and Michael Devereux

This paper studies the optimisation frictions that affect the cost of profit-shifting for multi-national companies. Using confidential UK corporate tax returns data for the years 2000 - 2015, we analyse the effects of foreign tax rate cuts on the extensive and intensive margins of profit reporting in the UK. We show that profits of multinational firms operating in the UK do not react to tax rate changes in their home countries at the intensive margin. Instead, our reduced-form evidence shows large extensive margin responses, providing evidence for the presence of fixed costs related to profit shifting. We build a structural model which accounts for those fixed costs and we estimate the extent of shifting frictions alongside the intensive and extensive margin elasticities of taxable profit.

Business Location Decisions with a Global Minimum Tax

with Francois Bares and Michael Devereux

In an historic agreement in 2021, 141 countries agreed on imposing a global minimum tax (GMT) on the profits of multinational corporations. Proponents of the GMT argue that the measure will reduce the distortion to businesses' location decisions by reducing the dispersion in tax rates internationally. We investigate the impact of the GMT on business location and investment decisions. To do this, we develop a location choice model based on effective average tax rates (EATRs) augmented with incentives for profit-shifting to low-tax jurisdictions. GMT affects the dispersion of EATRs for new investment in different countries, but its impact is non-monotonic in the threshold rate. For low values of the GMT threshold, the introduction of a minimum tax increases EATRs more in high-tax countries relative to low tax countries, increasing the dispersion of EATRs. As the statutory minimum rate increases, more low-tax countries begin to set their tax rate at the threshold, reducing the dispersion. An increased threshold has heterogeneous cost of capital effects for different countries; we find that a high threshold rate may substantially depress capital accumulation in investment hubs. This analysis provides a novel contribution to the literature on the relationship between taxation and corporate decisions on real activity.

Heterogeneous Responses to Capital Taxes: Evidence from the Introduction of a Dividend Tax

with Katarzyna Bilicka and Evangelos Koumanakos

In this paper, we analyze the effects of the introduction of a flat tax on dividends on firm behavior. We use the population of company tax returns in Greece matched with detailed company accounts over the period 2003 - 2018. To identify the causal effect of dividend taxes, we use exogenous variation in how the policy affected firms with different legal statuses and different financial year-end dates. We find that affected private firms immediately and significantly reduce payouts, mostly at the extensive margin, even if they previously always distributed dividends. Firms that reduce payouts increase investment and retained earnings. For firms that do not reduce payouts, we do not find these corresponding increases. In the long run, the efficiency of money reallocation within the firm in response to the dividend tax reform predicts the likelihood of bankruptcy. For firms that have a tax-free year to distribute, the announcement of dividend tax significantly increases their distributions and reduces investment in that year. As such, we also provide the first empirical evidence for the intertemporal tax arbitrage theory of Korinek and Stiglitz (2009).