Why do effective tax rates fall with capital intensity?

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. • Capital intensity is negatively associated with corporate effective tax rates. • Non-parametric methods reveal strong cross-country heterogeneity. • Capital accumulation lowers effective tax rates in Hungary, Italy, and Spain. • Cost-recovery provisions and tax planning jointly drive the ETR decline.