Investment Responses to a Corporate Tax Kink: Evidence from Small Businesses in Canada

This paper studies the underlying drivers of taxable income bunching at the corporate income tax kink by small businesses. 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. Bunching 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.