Can Tax Drive Capital Investment?

Abstract

This paper examines the effects of tax system changes and corporate tax payout changes on capital investment. We would expect a change in capital investment when the corporate tax payout changes and also when there is a shift from one tax system to another. This study examines the effects on capital investment of: (1) changing in corporate tax payout in Canada and the United Kingdom (1981-2015); and (2) when changing from a classical to an imputation tax system in Australia (1981-2002) and Taiwan (1989-2013). By employing fixed effect models, our findings show that changing in corporate tax payout within the imputation tax system of Canada and The United Kingdom increase capital investment. Our findings also suggest that moving from a classical to an imputation system had an impact on capital expenditure for firms in both Australia and Taiwan. However, we did not find a strong relationship between tax payout changes and capital investment within a classical system.