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Why do effective tax rates fall with capital intensity?

Year: 2026

Type: article

Abstract: This paper examines why corporate effective tax rates (ETRs) tend to decline as capital per worker increases. We decompose the ETR into two channels: a statutory cost-recovery component that mechanically lowers the taxable base with capital accumulation, and a discretionary tax-planning component whose effectiveness rises with capital intensity. Using firm-level data from six European countries, we estimate this relationship non-parametrically. We find that a 10% increase in capital intensity reduces the ETR by about 0.30 percentage points in Hungary, 0.11 points in Spain, and 0.10 points in Italy. By contrast, no significant relationship is found for France, Germany, and the UK, suggesting cross-country differences in cost-recovery provisions and enforcement environments.

Source: Economics Letters

DOI: 10.1016/j.econlet.2026.112827

Authors: I. Bournakis, D. Christopoulos

Institutions: SKEMA Business School, Université Côte d'Azur, Athens University of Economics and Business

Language: English

Topic: Corporate Taxation and Avoidance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: hybrid

Estimated APC paid: $3,030