Corporation Tax Asymmetries and Investment: Evidence from UK Panel Data
Theoretical work has emphasised the potential powerful impact of corporation tax asymmetries on investment behavior. Empirical work has been confined, however, to the essentially descriptive task of measuring implied effective tax rates. This paper uses panel data from 597 UK companies for 1973-1986 to address directly the central behavioral issue: are tax asymmetries important to understanding observed investment behavior? An optimizing investment model is developed and estimated both as an Euler equation in which the cost of capital appears and as a Q equation. Asymmetries are shown to generate considerable variation in firms' effective tax positions. Nevertheless, their careful modeling does not noticeably improve the empirical performance of these equations. Possible explanations of this puzzle are discussed.
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