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Corporation Tax Asymmetries and Firm-Level Investment in Canada

Author

Listed:
  • Pierre-Pascal Gendron

    (The Business School, Humber Institute of Technology & Advanced Learning and International Tax Program, Rotman School of Management, University of Toronto)

  • Gordon Anderson

    () (Department of Economics, University of Toronto)

  • Jack M. Mintz

    (Rotman School of Management, University of Toronto)

Abstract

An empirical model is developed to estimate the probability of a given tax status based on firm characteristics. A structural switching regression model of the firm’s demand for capital goods is next specified and incorporates expressions for the user cost of capital which account for tax asymmetries. The switching model, which incorporates the estimated tax status probabilities, is used to investigate the potential endogeneity of the cost of capital using a balanced panel of Canadian companies over the period 1976-94. Empirical results suggest that tax status affects capital acquisition behaviour.

Suggested Citation

  • Pierre-Pascal Gendron & Gordon Anderson & Jack M. Mintz, 2003. "Corporation Tax Asymmetries and Firm-Level Investment in Canada," International Tax Program Papers 0303, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto.
  • Handle: RePEc:ttp:itpwps:0303
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    File URL: http://www-2.rotman.utoronto.ca/iib/ITP0303.pdf
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    References listed on IDEAS

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    5. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
    6. Edwards, J. S. S. & Mayer, C. P., 1991. "Leasing, taxes, and the cost of capital," Journal of Public Economics, Elsevier, vol. 44(2), pages 173-197, March.
    7. Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1994. "A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 1-74.
    8. Rosanne Altshuler & Alan J. Auerbach, 1990. "The Significance of Tax Law Asymmetries: An Empirical Investigation," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 61-86.
    9. Lawrence H. Summers, 1987. "Investment Incentives and the Discounting of Depreciation Allowances," NBER Chapters,in: The Effects of Taxation on Capital Accumulation, pages 295-304 National Bureau of Economic Research, Inc.
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    13. John B. Shoven & Michael Topper, 1992. "The Cost of Capital in Canada, the United States, and Japan," NBER Chapters,in: Canada-U.S. Tax Comparisons, pages 217-236 National Bureau of Economic Research, Inc.
    14. MacKie-Mason, Jeffrey K, 1990. " Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-1493, December.
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    Cited by:

    1. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," IMF Working Papers 06/152, International Monetary Fund.

    More about this item

    Keywords

    Corporation Tax; Losses; Investment; Regime Switching;

    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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