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Capital Taxes with Real and Financial Frictions

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  • Jason M. DeBacker
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    Abstract

    This paper studies how frictions, both real and financial, interact with capital tax policy in a dynamic, general equilibrium model with heterogeneous firms. Comparative statics show that tax policy can have substantially different effects depending upon the frictions present. Analytical and numerical exercises show that accounting for firm heterogeneity is important when evaluating the responses of economic aggregates to capital tax policy. The effects of tax cuts on allocational efficiency are found to be quantitatively significant, often accounting for the majority of the change in output following a reduction in taxes on capital.

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    File URL: http://capone.mtsu.edu/berc/working/CapTax_final.pdf
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    Bibliographic Info

    Paper provided by Middle Tennessee State University, Department of Economics and Finance in its series Working Papers with number 201402.

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    Date of creation: Sep 2011
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    Handle: RePEc:mts:wpaper:201402

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    Web page: http://www.mtsu.edu/~berc/working/Economics_Working_Papers.html
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    Related research

    Keywords: Corporate Finance; Firm Dynamics; Capital Taxation; Allocational Efficiency;

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    1. Brennan, Michael J & Thakor, Anjan V, 1990. " Shareholder Preferences and Dividend Policy," Journal of Finance, American Finance Association, vol. 45(4), pages 993-1018, September.
    2. Christopher L. House & Matthew D. Shapiro, 2004. "Phased-In Tax Cuts and Economic Activity," Macroeconomics 0404009, EconWPA.
    3. Francois Gourio & Jianjun Miao, 2006. "Firm Heterogeneity and the Long-Run Effects of Dividend Tax Reform," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-160, Boston University - Department of Economics.
    4. Edwards, J S S & Keen, M J, 1984. "Wealth Maximization and the Cost of Capital: A Comment," The Quarterly Journal of Economics, MIT Press, vol. 99(1), pages 211-14, February.
    5. James M. Poterba & Lawrence H. Summers, 1985. "The Economic Effects of Dividend Taxation," NBER Working Papers 1353, National Bureau of Economic Research, Inc.
    6. Simon Gilchrist & Charles P. Himmelberg, 1995. "Evidence on the Role of Cash Flow for Investment," Working Papers 95-01, New York University, Leonard N. Stern School of Business, Department of Economics.
    7. Christopher Hennessy & Toni Whited, 2004. "Debt Dynamics," 2004 Meeting Papers 592, Society for Economic Dynamics.
    8. Auerbach, Alan J., 1979. "Share valuation and corporate equity policy," Journal of Public Economics, Elsevier, vol. 11(3), pages 291-305, June.
    9. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1994. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," NBER Working Papers 4887, National Bureau of Economic Research, Inc.
    10. Bayraktar, Nihal & Sakellaris, Plutarchos & Vermeulen, Philip, 2005. "Real versus financial frictions to capital investment," Working Paper Series 0566, European Central Bank.
    11. Russell Cooper & John Haltiwanger & Laura Power, 1995. "Machine Replacement and the Business Cycle: Lumps and Bumps," NBER Working Papers 5260, National Bureau of Economic Research, Inc.
    12. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
    13. Barclay, M.J. & Smith, C.W., 1988. "Corporate Payout Policy: Cash Dividencds Versus Open- Market Repurchases," Papers 88-10, Rochester, Business - Managerial Economics Research Center.
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