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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).

Suggested Citation

  • Giampaolo Arachi & Federico Biagi, 2005. "Taxation, Cost of Capital and Investment: Do Tax Asymmetries Matter?," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 64(2-3), pages 295-322, November.
    • Handle: RePEc:gde:journl:gde_v64_n2-3_p295-322
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    References listed on IDEAS

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    Cited by:

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    2. Cristian Bartolucci & Francesco Devicienti, 2012. "Better Workers Move to Better Firms: A Simple Test to Identify Sorting," Carlo Alberto Notebooks 259, Collegio Carlo Alberto.
    3. Keser, Claudia & Kimpel, Gerrit & Oestreicher, Andreas, 2014. "The CCCTB option: An experimental study," University of Göttingen Working Papers in Economics 199, University of Goettingen, Department of Economics.
    4. David Card & Francesco Devicienti & Agata Maida, 2014. "Rent-sharing, Holdup, and Wages: Evidence from Matched Panel Data," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(1), pages 84-111.
    5. Claudia Keser & Gerrit Kimpel & Andreas Oestreicher, 2014. "The CCCTB option – an experimental study," CIRANO Working Papers 2014s-24, CIRANO.
    6. Keser, Claudia & Kimpel, Gerrit & Oestreicher, Andreas, 2014. "The CCCTB option an experimental study," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100490, Verein für Socialpolitik / German Economic Association.
    7. 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.
    8. Claudia Keser & Gerrit Kimpel & Andreas Oestreicher, 2016. "Would a CCCTB mitigate profit shifting?," CIRANO Working Papers 2016s-29, CIRANO.

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    More about this item

    Keywords

    corporate taxation; cost of capital; investment; tax asimmetries;
    All these keywords.

    JEL classification:

    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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