Question: Investment and the corporate income tax: Suppose the user cost of capital in an economy with no corporate income tax is 10 percent.
(a) What is the user cost if the corporate tax rate rises to 20 percent? 30 percent?
(b) Suppose an economy's steady-state investment rate I / Y is 30 percent when the corporate tax rate is zero. What happens to this investment rate if the corporate tax rate rises to 20 percent? 30 percent?
(c) Are differences in corporate tax rates across countries a plausible explanation for the large variation in investment rates that we see in the data?