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Lumpy Investment and Corporate Tax Policy

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  • Jianjun Miao

    ()
    (Department of Economics, Boston University)

  • Pengfei Wang

    ()
    (Department of Economics, Hong Kong University of Science and Technology)

Abstract

This paper studies the impact of corporate tax policy on the economy in the presence of both convex and nonconvex capital adjustment costs in a dynamic general equilibrium model. We show that corporate tax policy generates both intensive and extensive margin effects via the channel of marginal Q. Its impact is determined largely by the strength of the extensive margin effect, which in turn depends on the cross-sectional distribution of firms. Depending on the initial distribution of firms, the economy displays asymmetric responses to tax changes. We also show that an anticipated decrease in the future corporate income tax rate raises investment and adjustment rate immediately, while an anticipated increase in the future investment tax credit reduces investment and adjustment rate initially. Our general equilibrium analysis demonstrates that a partial equilibrium analysis of tax policy can be quite misleading both quantitatively and qualitatively.

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Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number wp2009-016.

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Length: 38
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Handle: RePEc:bos:wpaper:wp2009-016

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Keywords: generalized (S; s) rule; lumpy investment; general equilibrium; marginal Q; tax policy; adjustment costs;

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References

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  1. Abel, Andrew B., 1990. "Consumption and investment," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 14, pages 725-778 Elsevier.
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