Tax Policy, Investment, and Financial Constraints: Heterogeneous Responses to the 2013 Swedish Corporate Income Tax Reform

Sammanfattning: There is little research at the intersection of corporate income taxation, financial constraints, and investments. We seek to clarify this relationship by investigating the heterogeneous investment responses of constrained and unconstrained firms induced by the 2013 reduction in the Swedish statutory corporate income tax rate from 26.3 to 22 percent. We develop a two-period theoretical model to predict how firms in these two groups respond to tax cuts, and employ a Difference-in-Differences strategy to firm-level panel data between 2010-2017. We find that financially unconstrained firms increased their rates of investments more than constrained firms in response to the lowering of the corporate income tax rate. We contribute to the literature by developing a theoretical framework, as few others have before, and by shining light on the channels through which the heterogeneous effects seen in the data occur. Thereby, we add to the understanding of how different tax policies, depending on their design, may induce different effects. We further demonstrate the utility of using cash holdings as a proxy for financial constraints.