Firm Investment and the User Cost of Capital: New US Corporate Tax Reform Evidence

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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. Following the method of Auerbach and Hassett (1991), we use TCJA as a natural experiment to estimate the impact of changes in user cost of capital on investment. Using cross-sectional data, we find that the user cost 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 increases in their investment rates several years after the tax reform, with individually statistically significant coefficients in half of the post-TCJA years. On average across years we find the magnitude of a 1 percentage point decrease in user cost is associated with a statistically significant 1.86 percentage point increase in the rate of investment. This translates into an investment elasticity of –2.11, about three times the investment response assumed in Congressional Budget Office models.