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Corporate Tax Policy and Long-Run Capital Formation: The Role of Irreversibility and Fixed Costs

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  • Jianjun Miao

    ()
    (Department of Economics, Boston University)

Abstract

This paper presents an analytically tractable continuous-time general equilibrium model with investment irreversibility and fixed adjustment costs. In the model, there is a continuum of firms that are subject to idiosyncratic shocks to capital. Although the presence of investment frictions lowers consumer welfare, it may raise or reduce the long-run average capital stock, depending on the degree of idiosyncratic uncertainty. An increase in this uncertainty may raise equilibrium aggregate capital, but reduce welfare. An unexpected permanent change in the corporate income tax rate affects the investment trigger and target values, and hence the size and rate of capital adjustment. Following this tax policy, the percentage changes in equilibrium quantities are larger when fixed adjustment costs are larger. These changes are significantly smaller in a general equilibrium model than in a partial equilibrium model.

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Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - The Institute for Economic Development Working Papers Series with number dp-181.

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Length: 40
Date of creation: Apr 2009
Date of revision:
Handle: RePEc:bos:iedwpr:dp-181

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Keywords: irreversibility; fixed costs; heterogeneity; tax policy; general equilibrium;

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Cited by:
  1. Miao, Jianjun & Wang, Pengfei, 2009. "Does Lumy Investment Matter for Business Cycles?," MPRA Paper 14977, University Library of Munich, Germany.
  2. Jianjun Miao & Pengfei Wang, . "Lumpy Investment and Corporate Tax Policy," Boston University - Department of Economics - Working Papers Series wp2009-016, Boston University - Department of Economics.

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