Last time I discussed the relationship between the cost of capital and investment.
Given that motivation, the goal of this post is to understand whether investment is responsive to changes in the UCC due to changes in tax settings. This does two things:
- Provides evidence regarding whether the capital stock will ultimately be influenced by corporate tax policy changes.
- Helps us understand how changes in the cost of capital can “shift” investment through time, thereby helping economic stabilisation. Note: The cost of capital varies with both taxes and interest rates, so this relates across to monetary policy!