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Fiscal Policy, Maintenance Allowances and Expectation-Driven Business Cycles

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Author Info
Nicolas L. Dromel () (Centre d'Economie de la Sorbonne - Paris School of Economics)
Abstract

Firms devote significant resources to maintain and repair thei existing capital. Within a real business cycle model featuring arguably small aggregate increasing returns, this paper assesses the stabilizing effects of fiscal policies with a maintenance expenditure allowance. In this setup, firms are authorized to deduct their maintenance expenditures from revenues in calculating pre-tax profits, as in many prevailing tax codes. While flat-rate taxation does not prove useful to insulate the economy from self-fulfilling beliefs, a progressive tax can render the equilibrium unique. However, we show that the required progressivity to protect the economy against sunspot-driven fluctuations is increasing in the maintenance-to-GDP ratio. Taking into account the maintenance and repair activity of firms, and the tax deductibility of the related expenditures, would then weaken the expected stabilizing properties of progressive fiscal schedules.

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File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2009/09031.pdf
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Publisher Info
Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 09031.

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Length: 23 pages
Date of creation: May 2009
Date of revision:
Handle: RePEc:mse:cesdoc:09031

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Web page: http://ces.univ-paris1.fr/
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Related research
Keywords: Business cycles; maintenance and repair allowances; capital utilization; progressive income taxes; local indeterminacy and sunspots.;

Find related papers by JEL classification:
D33 - Microeconomics - - Distribution - - - Factor Income Distribution
D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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This page was last updated on 2009-11-23.

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