Corporate taxation and the composition of capital

This chapter provides evidence on the responsiveness of investment to business tax incentives measured by the tax-adjusted user cost of capital. Departing from the existing empirical literature, which mostly looks at aggregate investment, it focuses on different types of capital assets. The study shows that when asset heterogeneity is explicitly accounted for, corporate taxation might not only have negative impacts on the level of investment, but also affect its composition, and thus, the composition of the aggregate capital stock. Given the magnitude of the estimated cost elasticity, and the substitution patterns across assets, the results suggest that high taxation at the margin might be particularly detrimental for investment in ICT capital, rather than in more traditional asset types, such as non-ICT equipment and buildings. All in all, the study corroborates the view that taxation may play a significant role at the current juncture in supporting the recovery by stimulating investment, particularly in capital assets that have a significant impact on growth.