The Neoclassical Theory of Firm Investment and Taxes: A Reassessment

This paper revisits the neoclassical theory of firm investment and its application to tax policy, arguing that decades of empirical and policy analysis have misapplied key theoretical concepts. It shows that commonly used estimates of the “user cost elasticity” capture different underlying economic objects depending on assumptions about output and wages, leading to confusion in interpreting the effects of taxation on investment. By reconciling these interpretations, the paper provides a unified framework linking firm-level evidence to aggregate investment responses and helps explain why economists and policy institutions reach differing conclusions about the impact of corporate taxes.