Tax rate cut and firm investment: evidence from Thailand

ABSTRACT

How do firms’ investment respond to a large corporate tax rate cut in developing countries? This study uses a matched difference-in-difference approach to estimate the investment responses of Thailand’s 2012–13 corporate income tax cut. It finds that the tax cut has significantly boosted investment. The findings also underline the heterogeneity of the investment responses between local and foreign firms as well as the potential roles of policy uncertainty and market competition on investment response.

KEYWORDS:

• Investment
• taxation
• developing countries
• corporate income tax

JEL CLASSIFICATION:

• G31
• H25
• H32

Acknowledgments

I would like to thank Patricia Mongkhonvanit, Krislert Samphantharak, Kanis Saengchote, Revenue Department staffs and participants at the 2019 Bank of Thailand symposium for their helpful comments and suggestions. Nanthawat Ouysinprasert and Thakoon Chantasantitam provide excellent research assistance.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ Rosenbaum and Rubin (1985) suggest that using a caliper width of 0.2 of standard deviation of the logit of the propensity score would eliminate 95% of the bias resulting from the measured confounders. Given that the standard deviation of the logit is roughly 1 in my baseline matching model, I use the caliper width of 0.2.

² In addition to the robustness test presented here, I also perform a sensitivity check by requiring firms to be in the sample at least throughout 2010–2014. The result is consistent with the baseline estimate.

Additional information

Funding

This work was supported by the Thailand Research Fund [grant number RSA6180012].