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Inflation, Taxation, and Corporate Investment: A q-Theory Approach

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  • Lawrence H. Summers

Abstract

This paper presents an analysis of the effects of tax policy on capital accumulation and valuation based on James Tobin's q theory of investment. As Tobin has explained, aggregate investment can be expected to depend in a stable way on q, the ratio of the stock market valuation of existing capita1 to its replacement cost. For example, increases in the rate of return on physical capital raise its market value and cause increased investment until equilibrium is restored. Although models linking the stock market to investment have been estimated, they have not previously been used to examine the impact of tax policies. The basic idea underlying the approach taken here can be described quite simply. It is generally assumed that the stock market valuation of corporate capital represents the present value of its future dividend stream. In the model of this paper, the effects of tax changes on future profits are used to estimate the impact of those changes on the stock market. These estimates in turn are used as a basis for gauging the impact of the tax changes on capital formation. This approach, working through q, can provide estimates of the effects of policy announcements and of personal tax reforms as well as estimates of the distributional impact of alternative reforms. A distinct feature of the model developed here is that it is rooted in a microeconomic theory that integrates the interests of the corporation and its shareholders.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0604.

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Date of creation: Dec 1980
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Publication status: published as Summers, Lawrence H. "Taxation and Corporate Investment: A q-Theory Approach." Brookings Papers on Economic Activity, 1:1981, pp. 67-127.
Handle: RePEc:nbr:nberwo:0604

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Cited by:
  1. Jacques Mairesse & Alan K. Siu, 1984. "An Extended Accelerator Model of R&D and Physical Investment," NBER Chapters, National Bureau of Economic Research, Inc, in: R & D, Patents, and Productivity, pages 271-298 National Bureau of Economic Research, Inc.
  2. William P. Osterberg, 1992. "Debt, collateral, and U.S. manufacturing investment: 1954-1980," Working Paper, Federal Reserve Bank of Cleveland 9210, Federal Reserve Bank of Cleveland.
  3. Michael Dworsky & Lawrence Goulder & Marc Hafstead, 2009. "Impacts of Alternative Emissions Allowance Allocation Methods Under a Federal Cap-and-Trade Program," Discussion Papers, Stanford Institute for Economic Policy Research 08-048, Stanford Institute for Economic Policy Research.
  4. Klette, Tor Jakob & M√łen, Jarle, 2011. "R&D investment responses to R&D subsidies: A theoretical analysis and a microeconometric study," Discussion Papers, Department of Business and Management Science, Norwegian School of Economics 2011/15, Department of Business and Management Science, Norwegian School of Economics.

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