Firm Investment And The User Cost Of Capital: New US Corporate Tax Reform Evidence

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 corporate tax law changes including TCJA as quasi natural experiments to estimate the impact of changes in user cost on investment. Following the method of Auerbach and Hassett (1991), using cross-sectional data we find that the user cost of capital 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 1.27 to 2.39 increase the rate of investment, larger than prior estimates of the elasticity of investment with respect to user cost of capital.

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