Tax incentives and investment in the UK

Business investment is one of the most volatile components of demand. Whether or not tax policy can be used to boost investment is an age-old policy question. After documenting both how tax policy has changed since 1980 and the impact of these changes on the cost of capital, this paper investigates that question using a UK dataset. The paper shows that tax changes have had large impacts on the user cost of capital, but that estimates of the user cost elasticity imply quite small impacts on the long-run capital stock. Adopting an alternative experimental approach for the first time using UK data shows large impacts of taxation on investment in periods following the announcement of major reforms.