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Why is the Corporation Tax Not Neutral?. Anticipated Tax Reform, Investment Spurts and Corporate Borrowing

  • Luis Alvarez
  • Vesa Kanniainen
  • Jan Södersten

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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Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 56 (1999)
Issue (Month): 3/4 (July)
Pages: 285-

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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200007)56:3/4_285:witctn_2.0.tx_2-d
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