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12:30 - 13:45 20 April 2015

Incorporation for Investment


IFS Seminar Room | Institute for Fiscal Studies (link Map)
7 Ridgmount Street | London | WC1E 7AE | United Kingdom

Open to: Academic | Student
Ticketing: Open

Speaker information

Li Liu, Said Business School, Oxford

We estimate the effect of corporation tax on small business incorporation and investment by exploring cross-sectional variation in the impact of a 2006/07 tax reform in a difference-in-differences design. Analyzing the population of UK corporation tax records from 2002/03 to 2008/09, we present three findings. First, a one percentage point increase in the tax gains to incorporation increases the number of newly incorporated companies by around 2 to 4.5%. Second, there is a strong cash flow effect of taxes on corporate investment. On average, for a company that consistently invests, a £10 increase in the tax bill reduces the investment rate by around £4. Third, the cash flow effect of corporation taxes on investment is most pronounced for newly incorporated firms, and diminishes over time. This evidence is consistent with the hypothesis that incorporation lowers the cost of external finance for small businesses, and that the cost is further reduced


Institute for Fiscal Studies
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