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Anticipated tax reforms and temporary tax cuts: A general equilibrium analysis

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  • Strulik, Holger
  • Trimborn, Timo

Abstract

Macroeconomic studies of tax policy in dynamic general equilibrium usually assume that reforms hit the economy unexpectedly and last forever. Here, we explore how previous results change when we allow policy changes to be pre-announced and of finite duration and when these facts are anticipated by households and firms. Quantitatively we demonstrate a headstart advantage from pre-announcement that is never caught up by a surprising reform. The welfare gain stemming from a 5-year announcement phase of a corporate tax cut, for example, is estimated to be around 10 percent of the total gain from the reform. We show that impulse responses of important variables like firm value, dividends, and investment differ qualitatively depending on whether the reform comes expected or not. We are also able to demonstrate a genuine welfare gain from temporary tax cuts. Impulse responses generated by our numerical method can be retraced by phase diagram analysis, which facilitates explanation and interpretation of the produced results.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 10 (October)
Pages: 2141-2158

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:10:p:2141-2158

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Keywords: Tax reform Anticipation effects Investment Economic growth Welfare Corporate finance Capital taxation;

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Cited by:
  1. Strulik, Holger & Trimborn, Timo, 2012. "Laffer strikes again: Dynamic scoring of capital taxes," European Economic Review, Elsevier, vol. 56(6), pages 1180-1199.
  2. Evans, George W. & Honkapohja, Seppo & Mitra, Kaushik, 2012. "Policy Change and Learning in the RBC Model," CEPR Discussion Papers 8892, C.E.P.R. Discussion Papers.
  3. Kizuku Takao, 2014. "Dynamic effects of anticipated and temporary tax changes in a R&D-Based growth model," Discussion Papers in Economics and Business 14-10, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  4. Strulik, Holger & Trimborn, Timo, 2011. "The Dark Side of Fiscal Stimulus," Hannover Economic Papers (HEP) dp-466, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  5. Strulik, Holger & Trimborn, Timo, 2009. "Fiscal Stimulus: A Neoclassical Perspective," Hannover Economic Papers (HEP) dp-421, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  6. Strulik, Holger & Trimborn, Timo, 2013. "The dark side of fiscal stimulus," Center for European, Governance and Economic Development Research Discussion Papers 150, University of Goettingen, Department of Economics.

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