Tax elasticity estimates for capital stocks in Canada [electronic resource] / by Jean-Francois Wen and Fatih Yilmaz.

[Washington, D.C.] : International Monetary Fund, 2020.©2020

Wen, Jean-François. author.

Yilmaz, Fatih. author.

International Monetary Fund. issuing body.

01-01-2020

1 online resource (28 pages).

text

online resource

IMF working paper ; no. 20/77

IMF working paper ; no. 20/77.

WEB (Copy 1) INTRANET 1257729-1001 ONLINE

Open item 

Canada

Marginal tax rates

Economic models

Overseas item

Statistics

"May 2020"

Includes bibliographical references.

9781513545981

The paper provides estimates of the long-run, tax-adjusted, user cost elasticity of capital (UCE) in a small open economy, exploiting three sources of variation in Canadian tax policy: across provinces, industries, and years. Estimates of the UCE with Canadian data are less prone to the endogeneity problems arising from the effects of tax policy changes on the interest rate or on the price of capital equipment. Reductions in the federal corporate income tax rate during the early 2000s for service industries but not for manufacturing, which already benefited from a preferential tax rate, contribute to the identification of the UCE. To capture the long-run relationship between the capital stock and the user cost of capital, an error correction model (ECM) is estimated. Supplementary results are obtained from a distributed lag model in first differences (DLM). With the ECM, our baseline UCE for machinery and equipment (M&E) is -1.312. The corresponding semi-elasticity of the stock of M&E with respect to the METR is about -0.2, suggesting, for example, that a 5 percentage point reduction in the METR, say from 15 to 10 percent, would in the long run generate an increase of 1.0 percent in the stock of M&E. The UCE for non-residential construction is statistically insignificantly different from zero.

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1257729-1001

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