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Direct and Indirect Effects of Investment Tax Incentives
Adrian Lerche
òòò½Íø Review (Forthcoming)
Abstract
This paper estimates the direct effects and indirect spillover effects
of investment tax credits on firms. Exploiting a differential
tax credit rate change by firm size in the German manufacturing
sector, I find that lowering a firm’s investment cost by 7.6 percent
increases its capital stock by 17.7 percent and employment by 12.0
percent. Positive local spillovers generate one additional manufacturing
job for each directly created job, are strongest between
firms in industries connected through input-output linkages, and
arise within distances of five kilometers. Firms dependent on local
consumer demand also increase employment, while within-industry
spillovers generate small negative effects.
