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Tax policy and business investment

In: Handbook of Public Economics

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Author Info
Hassett, Kevin A.
Hubbard, R. Glenn

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Abstract

In this survey, we review research on tax policy and business investment with four objectives. First, we use a simple prototypical dynamic neoclassical investment model to derive and explain effects of taxation on business investment in the long run and short run. Second, we describe and evaluate empirical tests of neoclassical channels, and we conclude that recent empirical evidence is consistent with neoclassical intuition. Third, we explore qualifications to basic theoretical models and their empirical tests raised by recent research on irreversibility and capital-market imperfections. Finally, we evaluate arguments for and against using tax policy to influence the level or timing of investment.While there is a consensus about the nature and magnitude of tax policy on investment demand considerable uncertainty remains regarding the structure of adjustment costs and the short-run dynamic effects of tax reforms. Consistent with our analysis of equilibrium investment outcomes, ascertaining the effects of tax policy on equilibrium investment requires additional research to examine responsiveness of interest rates, output, and the stock market to tax policy changes.

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This chapter was published in: A. J. Auerbach & M. Feldstein (ed.) Handbook of Public Economics, , chapter 20, pages 1293-1343, 2002.

This item is provided by Elsevier in its series Handbook of Public Economics with number 3-20.

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This chapter was published in the following book, which is listed on IDEAS:
A. J. Auerbach & M. Feldstein (ed.), 2002. "Handbook of Public Economics," Handbook of Public Economics, Elsevier, edition 1, volume 3, number 3, April. [Downloadable!] (restricted)
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H0 - Public Economics - - General

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  1. Klaus Weyerstraß, 2003. "Explaining Investment Trends in European Union Countries," IWH Discussion Papers 174, Halle Institute for Economic Research. [Downloadable!]
  2. Marco Cagetti & Mariacristina De Nardi, 2004. "Taxation, entrepreneurship, and wealth," Staff Report 340, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  3. John Fernald & Brent Neiman, 2006. "Measuring the miracle: market imperfections and Asia's growth experience," Working Paper Series 2006-17, Federal Reserve Bank of San Francisco. [Downloadable!]
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  4. Douglas A. Shackelford & Joel Slemrod & James M. Sallee, 2007. "A Unifying Model of How the Tax System and Generally Accepted Accounting Principles Affect Corporate Behavior," NBER Working Papers 12873, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Stefania Albanesi, 2006. "Optimal Taxation of Entrepreneurial Capital with Private Information," NBER Working Papers 12419, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Jorge Navas Rodenes & Jesus Marin Solano, 2006. "A comment on the cost of capital for investments with non-homogeneous components," Working Papers in Economics 146, Universitat de Barcelona. Espai de Recerca en Economia. [Downloadable!]
  7. Rosanne Altshuler & Jason Cummins, 1998. "Tax Policy and the Dynamic Demand for Domestic and Foreign Capital by Multinational Corporations," Departmental Working Papers 199808, Rutgers University, Department of Economics. [Downloadable!]
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  8. Schaller, Huntley, 2006. "Econometric Issues in Estimating User Cost Elasticity," Economics Series 194, Institute for Advanced Studies. [Downloadable!]
  9. Jason G. Cummins & Kevin A. Hassett & Stephen D. Oliner, 1999. "Investment behavior, observable expectations, and internal funds," Finance and Economics Discussion Series 1999-27, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  10. Martin D. Dietz, 2004. "Dividend and Capital Gains Taxation in a Cross-Section of Firms," Public Economics 0405004, EconWPA. [Downloadable!]
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