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Taxation, Cost of Capital and Investment: Do Tax Asymmetries Matter?

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  • Giampaolo Arachi

    ()
    (University of Lecce, Econpubblica, Bocconi University)

  • Federico Biagi

    ()
    (University of Padova, Econpubblica and S.D.A., Bocconi University)

Abstract

This paper provides new evidence on the effects of taxes on the cost of capital and investment based on panel data of 634 Italian firms for the period 1982-1998. In order to reduce the measurement error of the user cost, tax asymmetries are carefully taken into account by using the Shevlin-Graham methodology to proxy the marginal tax rate. The econometric analysis shows that the user cost (and hence taxes) is a relevant determinant of investment behavior (with an estimated elasticity of investment with respect to the user cost of capital which ranges from -0.199 to -0.217). However the careful modeling of tax asymmetries does not significantly improve the statistical performance of the investment model. Possible explanations are discussed with reference to similar findings in Devereux, Keen and Schiantarelli (1994).

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Bibliographic Info

Article provided by GDE (Giornale degli Economisti e Annali di Economia), Bocconi University in its journal Giornale degli Economisti e Annali di Economia.

Volume (Year): 64 (2005)
Issue (Month): 2-3 (November)
Pages: 295-322

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Handle: RePEc:gde:journl:gde_v64_n2-3_p295-322

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Related research

Keywords: corporate taxation; cost of capital; investment; tax asimmetries;

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References

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  1. repec:fth:coluec:465 is not listed on IDEAS
  2. Mayer, Colin, 1986. "Corporation Tax, Finance and the Cost of Capital," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 93-112, January.
  3. Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1994. "A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 1-74.
  4. Robert S. Pindyck, 1990. "Irreversibility, Uncertainty, and Investment," NBER Working Papers 3307, National Bureau of Economic Research, Inc.
  5. Cummins, Jason G. & Hassett, Kevin A. & Hubbard, R. Glenn, 1996. "Tax reforms and investment: A cross-country comparison," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 237-273, October.
  6. Alan J. Auerbach & Kevin Hassett, 1991. "Tax Policy and Business Fixed Investment in the United States," NBER Working Papers 3619, National Bureau of Economic Research, Inc.
  7. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  8. Graham, John R., 1996. "Proxies for the corporate marginal tax rate," Journal of Financial Economics, Elsevier, vol. 42(2), pages 187-221, October.
  9. Massimo Bordignon & Silvia Giannini & Paolo Panteghini, 2001. "Reforming Business Taxation: Lessons from Italy?," International Tax and Public Finance, Springer, vol. 8(2), pages 191-210, March.
  10. Chirinko, Robert S. & Fazzari, Steven M. & Meyer, Andrew P., 1999. "How responsive is business capital formation to its user cost?: An exploration with micro data," Journal of Public Economics, Elsevier, vol. 74(1), pages 53-80, October.
  11. Michael Devereux, 1991. "Corporation Tax Asymmetries and Investment: Evidence from UK Panel Data," Working Papers 820, Queen's University, Department of Economics.
  12. Maria Elena Bontempi & Silvia Giannini & Roberto Golinelli, 2005. "Corporate Tax Reforms and Financial Choices: An Empirical Analysis," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 64(2-3), pages 271-294, November.
  13. Graham, John R., 1996. "Debt and the marginal tax rate," Journal of Financial Economics, Elsevier, vol. 41(1), pages 41-73, May.
  14. Julian Alworth & Giampaolo Arachi, 2001. "The Effect of Taxes on Corporate Financing Decisions: Evidence from a Panel of Italian Firms," International Tax and Public Finance, Springer, vol. 8(4), pages 353-376, August.
  15. Stephen Bond & Costas Meghir, 1990. "Dynamic Investment Models and the Firm's Financial Policy," CEPR Financial Markets Paper 0013, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
  16. Devereux, Michael P, 1989. "Tax Asymmetries, the Cost of Capital and Investment: Some Evidence from United Kingdom Panel Data," Economic Journal, Royal Economic Society, vol. 99(395), pages 103-12, Supplemen.
  17. Bond, Stephen & Van Reenen, John, 2007. "Microeconometric Models of Investment and Employment," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 65 Elsevier.
  18. Hassett, Kevin A. & Hubbard, R. Glenn, 2002. "Tax policy and business investment," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 20, pages 1293-1343 Elsevier.
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Cited by:
  1. Cristian Bartolucci & Francesco Devicienti, 2012. "Better Workers Move to Better Firms: A Simple Test to Identify Sorting," Carlo Alberto Notebooks 259, Collegio Carlo Alberto.
  2. Keser, Claudia & Kimpel, Gerrit & Oestreicher, Andreas, 2014. "The CCCTB option: An experimental study," Center for European, Governance and Economic Development Research Discussion Papers 199, University of Goettingen, Department of Economics.
  3. Luigi Bernardi, 2005. "Tax Reforms in Italy and in Europe: An Introduction," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 64(2-3), pages 139-158, November.
  4. David Card & Francesco Devicienti & Agata Maida, 2010. "Rent-sharing, Holdup, and Wages: Evidence from Matched Panel Data," NBER Working Papers 16192, National Bureau of Economic Research, Inc.

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