Corporate Taxation and Capital Accumulation

This research project studies the impact of corporate taxation on investment and capital accumulation. This relationship is central to any evaluation of the effects, and welfare implications, of fiscal incentives that are intended to stimulate private sector investment, such as enhanced capital allowances (accelerated depreciation), an Allowance for Corporate Equity, or a reduction in the statutory corporate income tax rate. We use sectoral data for the USA, Japan, Australia and ten EU countries over the period 1982- 2007, which combines data on capital stocks, value-added and relative prices with measures of effective corporate tax rates. Our main findings suggest large effects of tax incentives on long-run capital accumulation. We find broadly similar effects when we decompose the variation in the cost of capital into its tax and non-tax components, so that these results are not simply driven by trends in the relative price of capital goods.

Stephen Bond