In the absence of financing frictions, profit taxes reduce investment by their effect on the user cost of capital. With … finance constraints due to moral hazard, investment becomes sensitive to cash-flow and own equity of firms. We propose a … corporate finance model of investment and derive three central results: (i) Even small taxes impose first order welfare losses …

The paper compares the impact of corporate taxation and social insurance on foreign direct investment (FDI) and …'s generous welfare states with high structural unemployment rates. -- Corporate tax ; foreign direct investment ; unemployment …