The effect of corporate taxes on Canadian investment

A 10 per cent reduction in the tax component of the user cost of capital is associated with an increase in the capital stock in the 3 to 7 per cent range, with the latter being the preferred estimate, since it is obtained using a more robust methodology. [...] In particular, it examines the responsiveness of investment to changes in the tax component of the user cost among industries that were affected by the tax reductions (i.e. [...] The capital tax, which applies to a firm’s capital stock above a certain threshold, also increases the user cost of purchasing capital.2 The effect of the corporate tax rate (τ ) on the user cost is more complex given its interaction with the other tax parameters. [...] Indeed, the conclusions from many general equilibrium models used to simulate the impact of corporate tax policy are sensitive to the estimate of the user cost behavioural parameter.3 Since Jorgenson (1963), an extensive empirical literature has emerged to explain the relationship between the user cost of capital and investment. [...] The sample covers the period before and after the tax reductions were announced, allowing the regression estimates to reflect the underlying investment process during the period of tax changes.