IDEAS home Printed from
   My bibliography  Save this book chapter

Tax policy and business investment

In: Handbook of Public Economics


  • Hassett, Kevin A.
  • Hubbard, R. Glenn


In this survey, we review research on tax policy and business investment with four objectives. First, we use a simple prototypical dynamic neoclassical investment model to derive and explain effects of taxation on business investment in the long run and short run. Second, we describe and evaluate empirical tests of neoclassical channels, and we conclude that recent empirical evidence is consistent with neoclassical intuition. Third, we explore qualifications to basic theoretical models and their empirical tests raised by recent research on irreversibility and capital-market imperfections. Finally, we evaluate arguments for and against using tax policy to influence the level or timing of investment.While there is a consensus about the nature and magnitude of tax policy on investment demand considerable uncertainty remains regarding the structure of adjustment costs and the short-run dynamic effects of tax reforms. Consistent with our analysis of equilibrium investment outcomes, ascertaining the effects of tax policy on equilibrium investment requires additional research to examine responsiveness of interest rates, output, and the stock market to tax policy changes.

Suggested Citation

  • Hassett, Kevin A. & Hubbard, R. Glenn, 2002. "Tax policy and business investment," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 20, pages 1293-1343, Elsevier.
  • Handle: RePEc:eee:pubchp:3-20

    Download full text from publisher

    File URL:
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    JEL classification:

    • H0 - Public Economics - - General


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:pubchp:3-20. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.