Investment responses to a corporate tax kink : evidence from small businesses in Canada / by Josip Lesica. : CS11-0019/486E-PDF

"This paper studies the underlying drivers of small business behavior at the discontinuity in the statutory corporate income tax rates, i.e., the corporate tax kink. It intends to capture the behavioural responses to the tax change at the kink. Increased investments and reported costs are possible strategies that firms use to adjust their taxable income to avoid higher tax rates. High concentration of firms in the taxable income distribution should then be accompanied by a spike in investment at the kink. To evaluate this hypothesis, this study employs the universe of firm-level tax returns from Canada over the 2001 to 2019 period to estimate the distribution of corporate investment and costs around the tax kink along the extensive and intensive margins. It calculates the share of firms that increased their investment to move to the kink and their contribution to overall bunching. Overall, the level and significance of bunching in investments and costs, over time and across specific capital categories, support the hypothesis that small businesses respond to the tax rate change by increasing investment in vehicles and machinery and equipment relatively more than in buildings or intangibles"--Abstract, page 5.

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