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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:
Date of revision:
Handle: RePEc:bos:wpaper:wp2009-016
Contact details of provider: Postal: 270 Bay State Road, Boston, MA 02215
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Fax: 617-353-4449
Web page: http://www.bu.edu/econ/

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  8. Christopher L. House & Matthew D. Shapiro, 2004. "Phased-In Tax Cuts and Economic Activity," Macroeconomics 0404009, EconWPA.
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  13. Caballero, R.J., 1996. "Fixed Costs: The Demise of Marginal q," Working papers 96-14, Massachusetts Institute of Technology (MIT), Department of Economics.
  14. Ruediger Bachmann & Ricardo J. Caballero & Eduardo Engel, 2008. "Aggregate Implications of Lumpy Investment: New Evidence and a DSGE Model," Cowles Foundation Discussion Papers 1566R, Cowles Foundation for Research in Economics, Yale University, revised Apr 2010.
  15. Aubhik Khan & Julia K. Thomas, 2000. "Nonconvex factor adjustments in equilibrium business cycle models: do nonlinearities matter?," Working Papers 00-10, Federal Reserve Bank of Philadelphia.
  16. Miao, Jianjun & Wang, Pengfei, 2009. "Does Lumy Investment Matter for Business Cycles?," MPRA Paper 14977, University Library of Munich, Germany.
  17. Mark E. Doms & Timothy Dunne, 1998. "Capital Adjustment Patterns in Manufacturing Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(2), pages 409-429, April.
  18. Kenneth L. Judd, 1983. "Short-Run Analysis of Fiscal Policy in a Simple Perfect Foresight Model," Discussion Papers 559, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  19. Francois Gourio & Anil K Kashyap, 2007. "Investment Spikes: New Facts And A General Equilibrium Exploration," Boston University - Department of Economics - Working Papers Series WP2007-006, Boston University - Department of Economics.
  20. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 257-275, April.
  21. Jianjun Miao, 2009. "Corporate Tax Policy and Long-Run Capital Formation: The Role of Irreversibility and Fixed Costs," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-181, Boston University - Department of Economics.
  22. Edward C. Prescott, 2002. "Prosperity and Depression," American Economic Review, American Economic Association, vol. 92(2), pages 1-15, May.
  23. 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.
  24. Russell W. Cooper & John C. Haltiwanger, 2000. "On the Nature of Capital Adjustment Costs," NBER Working Papers 7925, National Bureau of Economic Research, Inc.
  25. Julia K. Thomas, . "Is Lumpy Investment Relevant for the Business Cycle?," GSIA Working Papers 1998-E250, Carnegie Mellon University, Tepper School of Business.
  26. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
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