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Firm Investment and the User Cost of Capital: New US Corporate Tax Reform Evidence

In: Tax Policy and the Economy, Volume 40

Author

Listed:
  • Jonathan S. Hartley
  • Kevin A. Hassett
  • Joshua D. Rauh

Abstract

The Tax Cuts and Jobs Act of 2017 (TCJA) marked the first time in three decades that material changes were made to the corporate tax code of the United States. We use TCJA as a quasi natural experiment to estimate the impact of changes in user cost of capital on investment. Following the method of Auerbach and Hassett (1991), using cross-sectional data we find that the user cost is associated with higher rates of investment consistent with previous studies. BEA asset types with greater reductions in user cost of capital and marginal effective tax rate (METR) after the 2017 TCJA had greater statistically significant increases in their investment rates several years after the tax reform. Specifically, we find the magnitude of a 1 percentage point decrease in user cost is associated with a 1.68 to 3.05 percentage point increase in the rate of investment, larger than prior estimates of the responsiveness of investment with respect to user cost of capital.
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Suggested Citation

  • Jonathan S. Hartley & Kevin A. Hassett & Joshua D. Rauh, 2025. "Firm Investment and the User Cost of Capital: New US Corporate Tax Reform Evidence," NBER Chapters, in: Tax Policy and the Economy, Volume 40, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:15331
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    References listed on IDEAS

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    2. Lea Best & Benjamin Born & Manuel Menkhoff, 2025. "The Impact of Interest: Firms' Investment Sensitivity to Interest Rates," CESifo Working Paper Series 12167, CESifo.

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    More about this item

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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