Corporate taxation and capital accumulation: Evidence from sectoral panel data for 14 OECD countries

Stephen Bond and Jing Xing

Journal of Public Economics 130, 15-31. [2012]

Highlights

• We use new data sources on capital stocks and corporate taxes for 14 OECD countries

• For both total capital and total equipment, we find that corporate taxation affects capital-output ratios

• For equipment, these effects are summarised by the tax component of the user cost of capital, consistent with standard economic theory

• We estimate long-run tax elasticities in the range − 0.3 to − 0.7

Abstract

We present new empirical evidence that sector-level capital–output ratios are strongly influenced by corporate tax incentives, as summarised by the tax component of a standard user cost of capital measure. We use sectoral panel data for the USA, Japan, Australia and eleven EU countries over the period 1982–2007. Our panel combines internationally consistent data on capital stocks, value-added and relative prices from the EU KLEMS database with corporate tax measures from the Oxford University Centre for Business Taxation. Our results for equipment investment are particularly robust, and strikingly consistent with the basic economic theory of corporate investment.

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