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Why is the Corporation Tax not Neutral? Anticipated Tax not Reform, Invesment Spurts and Corporate Borrowing

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Author Info

  • Alvarez Jr., L.
  • Kanniainen, V.
  • Sodersten, J.

Abstract

The paper shows that a corporate tax policy which is thought to be neutral may have significant incentive effects. This result is established in a model with tax advantage to debt and expectations about a forthcoming tax reform. Investment spurt effects are established and compared to those of a firm with equity finance. A tax-cut cum base-broadening tax reform which leaves the long-run investment incentives of an all-equity firm unaffected is shown to cause a substantial short run investment hike. The findings are illustrated by numerical simulations indicating the magnitudes of the spurt effects.

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Bibliographic Info

Paper provided by Uppsala - Working Paper Series in its series Papers with number 2000:4.

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Length: 23 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:fth:uppaal:2000:4

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Postal: UPPSALA UNIVERSITY, DEPARTMENT OF ECONOMICS, S-751 20 UPPSALA SWEDEN.
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
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Web page: http://www.nek.uu.se/
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Related research

Keywords: TAXATION ; DEBT ; INVESTMENTS;

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Cited by:
  1. Chang Woon Nam & Doina Maria Radulescu, 2005. "Effects of Corporate Tax Reforms on SMEs’ Investment Decisions under the Particular Consideration of Inflation," CESifo Working Paper Series 1478, CESifo Group Munich.

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