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

Abstract

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.