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Taxation, user cost of capital and factor demand

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  • B. CRÉPON

    (Insee)

  • Ch. GIANELLA

    (Direction de la Prévision)

Abstract

In this paper we analyze the impact on the demand of capital and labour of changes in their relative costs, using micro data. We especially highlight the role of the user cost of capital, for which we propose an original measure based on the cost of debt and the cost of equity. We hence take advantage of changes in the taxation of capital to build instrument variables and to estimate a complete system of factor demands. First we find that the elasticity of substitution between capital and labour is relatively weak in the non manufacturing sector, about 0,4, whereas this parameter range from 0.6 to 0,8 in the manufacturing sector. Secondly, we show that the price elasticity of the demand for goods is quite high, and is almost equal to 2 in both industries. Thirdly and probably the most interesting result, we find a significant and direct relationship between the user cost of capital and the stock of capital, which does not appear in most former studies on French data. In a standard model of factor demand, our results mean that the wealth effect dominates the substitution effect. As a result, lowering the user cost of capital would lead, at partial equilibrium, to increase not only investment but also the employment level and output.

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Paper provided by Institut National de la Statistique et des Etudes Economiques, DESE in its series Documents de Travail de la DESE - Working Papers of the DESE with number g2001-09.

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Date of creation: 2001
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Handle: RePEc:crs:wpdeee:g2001-09

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Keywords: Taxation; user cost of capital; factor demand; firm data;

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  1. Cahuc, Pierre & Gianella, Christian & Goux, Dominique & Zylberberg, Andre, 2002. "Equalizing Wage Differences and Bargaining Power: Evidence from a Panel of French Firms," IZA Discussion Papers 582, Institute for the Study of Labor (IZA).
  2. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Alan J. Auerbach, 1982. "Taxation, Corporate Financial Policy and the Cost of Capital," NBER Working Papers 1026, National Bureau of Economic Research, Inc.
  4. John M. ABOWD & Laurence ALLAIN, 1996. "Compensation Structure and Product Market Competition," Annales d'Economie et de Statistique, ENSAE, issue 41-42, pages 207-217.
  5. Brigitte Dormont, 1997. "L'influence du coût salarial sur la demande de travail," Économie et Statistique, Programme National Persée, vol. 301(1), pages 95-109.
  6. Martin S. Feldstein, 1997. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 123-166 National Bureau of Economic Research, Inc.
  7. Michel Bua & François Legendre & Philippe Redondo & Philippe Girard, 1990. "Les effets favorables d'une baisse de la fiscalité des entreprises : une évaluation à partir de données individuelles," Économie et Statistique, Programme National Persée, vol. 229(1), pages 41-51.
  8. Olivier J. Blanchard, 1993. "Movements in the Equity Premium," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(2), pages 75-138.
  9. 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.
  10. François Legendre & Philippe Redondo & Philippe Girard & Michel Bua, 1991. "Financement, fiscalité et croissance des entreprises industrielles," Économie et Prévision, Programme National Persée, vol. 98(2), pages 45-68.
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