Tax Elasticity Estimates for Capital Stocks

We use panel cointegration techniques to estimate the long-run, tax-adjusted, user cost elasticity of capital (UCE) in a small open economy. The estimates exploit three sources of variation in Canadian tax policy: across provinces, industries, and years. The UCE is estimated to be between -1.1 and -1.3 for machinery and equipment. We also provide semielasticities of capital with respect to marginal effective tax rates (METR). Our construction of the user costs makes use of a detailed data set on federal and provincial tax policy variables.