RDP 2018-07: The GFC Investment Tax Break 7. Future Directions for Research

Several facets of our results are worth discussing in the context of the academic literature. The fact that Australian companies responded to the tax break suggests that it worked through non-standard mechanisms. We provide no direct evidence on what these non-standard mechanisms might be, but a key candidate is a relaxation in company-level financial constraints. Future work could examine the particular mechanisms that underlie the response of Australian companies to the tax break. The datasets we use include many markers of financial constraints and so would be well suited to the analysis, but including these markers may require different identification methods.

In this context, it is worth noting that most of the large elasticity estimates in the literature are based on data from economic downturns, including the GFC. Financial constraints are likely to be particularly binding during such periods, which might make the investment incentives more effective than they would have been during ‘normal’ times. Further work examining the effect of similar policies in normal times could be useful, especially if policymakers want to use estimates from empirical studies to help them to evaluate future polices.

Further data-driven research on the effect of taxation on real business decisions in Australia seems worthwhile. For example, while our work suggests that tax rates and breaks can affect real decisions for Australian companies despite the existence of the dividend imputation system, it provides only limited guidance on the potential effects of permanent changes, such as a permanent cut to the company tax rate. The fact that we find no evidence of a fall in businesses' investment after the expiry of the policy suggests that permanent changes might have similar effects. But studies based on temporary and permanent policies in the United States have often generated quite different results (see discussion in House and Shapiro (2008)). Future Australian-focused studies could examine changes to simplified depreciation rules for small businesses from 2012, the sharp change to the depreciation schedule that occurred in 1999, or the change in company tax rates for small companies in 2015 (as examined in AlphaBeta (2018)).