We improve upon existing approaches used to estimate investment models by exploiting tax reforms as "natural experiments." we find that tax policy has an economically important effect through the user cost of capital on firms' equipment investment following major tax reforms enacted in 1962, 1971, 1981, and 1986. This effect is most pronounced for firms not in tax loss positions and, thus, more likely to face statutory tax rates and investment incentives. We also demonstrate that tax-induced variation in the user cost of capital across equipment asset classes is negatively related to asset-specific investment forecast errors following major tax reforms, suggesting that ex ante knowledge of an impending tax reform can improve forecasts of investment.
Cummins, Jason, Kevin Hassett, and R. Glenn Hubbard. "Do Tax Reforms Affect Investment?" In Tax Policy and the Economy. Ed. J.M. Poterba. Cambridge, Mass.: MIT Press, 1995.
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