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

Author

Listed:
  • 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.

Suggested Citation

  • Alvarez Jr., L. & Kanniainen, V. & Sodersten, J., 2000. "Why is the Corporation Tax not Neutral? Anticipated Tax not Reform, Invesment Spurts and Corporate Borrowing," Papers 2000:4, Uppsala - Working Paper Series.
    • Handle: RePEc:fth:uppaal:2000:4
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    Cited by:

    1. Chang Nam & Doina Radulescu, 2007. "Effects of Corporate Tax Reforms on SMEs’ Investment Decisions under the Particular Consideration of Inflation," Small Business Economics, Springer, vol. 29(1), pages 101-118, June.

    More about this item

    Keywords

    TAXATION ; DEBT ; INVESTMENTS;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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