Abstract. How responsive is business investment to tax policy in Germany? Theoretical work has emphasized the impact on investment behavior through its effect on capital user costs, but evidence for a substantial user cost elasticity is sparse. However, most evidence has been based on aggregate data, and only a few recent studies for the U.S. use firm level data. In this paper we employ firm-level balance sheet data to analyze the nexus between user costs and investment. Using comprehensive panel data provided by the Deutsche Bundesbank, we estimate distributed-lag models and obtain a relatively precise estimate of about-0.42 for the user cost elasticity of investment. Error-correction models do not appear to generate estimates that can be interpreted in a structural way. We use the distributed-lag estimates to assess the prospective impact of tax reform measures in Germany. JEL Classification. C23, D21, H3
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