Corporate taxation and capital accumulation: Evidence from sectoral panel data for 14 OECD countries

a r t i c l e i n f o JEL classification: H25 E22 D92 Keywords: Corporate taxation Capital accumulation User cost of capital We present new empirical evidence that sector-level capital–output ratios are strongly influenced by corporate tax incentives, as summarised by the tax component of a standard user cost of capital measure. We use sectoral panel data for the USA, Japan, Australia and eleven EU countries over the period 1982–2007. Our panel combines internationally consistent data on capital stocks, value-added and relative prices from the EU KLEMS database with corporate tax measures from the Oxford University Centre for Business Taxation. Our results for equipment investment are particularly robust, and strikingly consistent with the basic economic theory of corporate investment. The last three decades have seen substantial changes to corporate income taxes in many OECD countries, starting with major reforms to corporate tax rates and allowances in the UK in 1984 and in the USA in 1986. Similar rate-cutting, base-broadening reforms have followed in other countries, with the statutory corporate tax rate in the Netherlands, for example, falling from 48% in 1982 to 26% in 2007. Conveniently , these changes to corporate income taxes have occurred at different times and to differing degrees in different jurisdictions. This paper exploits the resulting variation across countries and over time to study the impacts of corporate taxation on fixed investment in the short run and on fixed capital accumulation in the long run. These effects are important in assessing the welfare implications of taxes on corporate income. Reliable evidence on their nature and magnitude is also important for the design of fiscal incentives that are intended to stimulate private sector business investment. One innovation in this study is that we exploit the recently developed EU KLEMS database, which provides sectoral data on capital, output and relative prices for the USA, Japan, Australia and most of the EU countries. The key advantage of EU KLEMS is the availability of internationally comparable capital stock measures, constructed from the underlying investment series using consistent procedures across countries. This contrasts with different methodologies which are used to construct capital stock series in different national accounts and inherited, for example, in OECD datasets based on national accounts sources. We combine EU KLEMS with tax measures from the Oxford University Centre for Business Taxation's corporate tax database, which provides detailed information on corporate tax regimes for developed …