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Lumpy Investment and Corporate Tax Policy

  • Jianjun Miao


    (Department of Economics, Boston University)

  • Pengfei Wang


    (Department of Economics, Hong Kong University of Science and Technology)

This paper studies the impact of corporate tax policy on the economy in the presence of both convex and nonconvex capital adjustment costs in a dynamic general equilibrium model. We show that corporate tax policy generates both intensive and extensive margin effects via the channel of marginal Q. Its impact is determined largely by the strength of the extensive margin effect, which in turn depends on the cross-sectional distribution of firms. Depending on the initial distribution of firms, the economy displays asymmetric responses to tax changes. We also show that an anticipated decrease in the future corporate income tax rate raises investment and adjustment rate immediately, while an anticipated increase in the future investment tax credit reduces investment and adjustment rate initially. Our general equilibrium analysis demonstrates that a partial equilibrium analysis of tax policy can be quite misleading both quantitatively and qualitatively.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number wp2009-016.

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Length: 38
Date of creation:
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Handle: RePEc:bos:wpaper:wp2009-016
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  9. Russell W. Cooper & John C. Haltiwanger, 2006. "On the Nature of Capital Adjustment Costs," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 611-633.
  10. Abel, Andrew B., 1990. "Consumption and investment," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 14, pages 725-778 Elsevier.
  11. Ricardo J. Caballero & Eduardo M. R. A. Engel & John C. Haltiwanger, 1995. "Plant-Level Adjustment and Aggregate Investment Dynamics," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 1-54.
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  18. Uzawa, H, 1969. "Time Preference and the Penrose Effect in a Two-Class Model of Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 77(4), pages 628-52, Part II, .
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  21. Abel, Andrew B. & Eberly, Janice C., 1998. "The mix and scale of factors with irreversibility and fixed costs of investment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 101-135, June.
  22. Abel, Andrew B., 1982. "Dynamic effects of permanent and temporary tax policies in a q model of investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 353-373.
  23. Christophe Chamley, 1980. "The Welfare Cost of Capital Income Taxation in a Growing Economy," Cowles Foundation Discussion Papers 553, Cowles Foundation for Research in Economics, Yale University.
  24. Austan Goolsbee, 1998. "Investment Tax Incentives, Prices, and the Supply of Capital Goods," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 121-148.
  25. Michael Dotsey & Robert G. King & Alexander L. Wolman, 1999. "State-Dependent Pricing and the General Equilibrium Dynamics of Money and Output," The Quarterly Journal of Economics, Oxford University Press, vol. 114(2), pages 655-690.
  26. Jianjun Miao, . "Corporate Tax Policy and Long-Run Capital Formation: The Role of Irreversibility and Fixed Costs," Boston University - Department of Economics - Working Papers Series wp2008-023, Boston University - Department of Economics.
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