Three essays on the economic effects of tax policy

This dissertation comprises three empirical essays that explore how tax policy shapes firm behavior, investment decisions, and international competitiveness. Drawing on rich administrative and firm-level data from Germany, the United Kingdom, and across Europe, the studies investigate how firms respond to changes in tax incentives, using quasi-experimental methods to identify causal effects. Together, the essays contribute to the broader understanding of tax elasticity, fiscal stimulus effectiveness, and the global implications of tax reforms on multinational enterprise (MNE) behavior. The first essay examines heterogeneity in tax rate elasticities of capital by analyzing how firms adjust their capital stock in response to local business tax reforms in Germany. Exploiting spatial and temporal variation in municipal tax rates, the study estimates firm-level elasticities and identifies key moderators such as financial constraints, firm size, and tax avoidance behavior. Results reveal substantial heterogeneity in responsiveness: smaller and financially constrained firms show higher sensitivity to tax changes, while multi-plant and multinational firms exhibit greater scope for tax planning. The study underscores the importance of localized tax policy design and its varied impact across different firm types. The second essay evaluates tax loss carrybacks as a fiscal policy tool aimed at stimulating investment during economic downturns. Using a novel dataset that tracks firm-level tax refunds and capital expenditures, the analysis compares investment behavior among loss-making firms eligible for carrybacks versus placebo groups. While tax refunds do boost investment, the study highlights a trade-off: some of the capital is allocated to low-productivity firms, potentially distorting competitive selection and dampening aggregate output effects. The findings raise critical questions about the efficiency of tax-based stimulus measures, especially under conditions of financial distress or market uncertainty. The third essay explores how the taxation of foreign earnings affects the competitiveness of multinational firms, using the 2009 U.K. reform that shifted from a worldwide to a territorial tax system. By comparing the performance of U.K. multinationals before and after the reform to control groups, the study shows that affected firms increased both foreign and domestic fixed investment and sales. These effects were particularly strong in high-tax foreign jurisdictions, indicating that the reform reduced disincentives to repatriate profits and reinvest abroad. Further analysis reveals changes in industry-level dynamics, including increased investment intensity and output among sectors dominated by MNEs, suggesting that international tax policy can have far-reaching implications for global business behavior. The thesis concludes by integrating the findings to emphasize how different facets of tax policy—local, national, and international—interact with firm-level characteristics to produce complex economic effects. The essays collectively highlight the need for nuanced policy frameworks that account for firm heterogeneity, potential distortions, and the cross-border mobility of capital. Policymakers are advised to weigh short-term investment incentives against long-term allocation efficiency, especially when designing corporate tax reforms during periods of economic volatility.