IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

On Financial Adjustment and Investment Booms: Lessons from Tax Reforms

Listed author(s):
  • Vesa Kanniainen
  • Jan Södersten

The US and US tax reforms of the 1980s created tendencies in the OECD countries to cut tax rates and broaden tax bases. Though several studies have indicated the efficiency gains of such reforms, our results suggest that a policy of rate-cut-cum-base-broadening may actually reduce long-run capital formation. Moreover, given that a tax reform is anticipated, there is room for speculative investment behaviou. We suggest hence that there may be a trade-off between long-run efficiency gains and short-run costs in terms of additional volatility and increased indebtedness. Our model assumes constant returns and convex costs of adjustment. The financial and investment policy of firm is studied under various constraints on dividend policy, arising from the existing reporting conventions. It is shown that under uniform reporting requirement, an internal financial equilibrium exists and that the corporation income tax is equivalent to a cash-flow tax while under separate reporting, it is optimal to finance by debt and tax debt only. Some positive implications for international capital flows are pointed out and some normative issues are raised.

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 95-01.

in new window

Date of creation:
Handle: RePEc:kud:epruwp:95-01
Contact details of provider: Postal:
Øster Farimagsgade 5, Building 26, DK-1353 Copenhagen K., Denmark

Phone: (+45) 3532 4411
Fax: +45 35 32 30 00
Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:kud:epruwp:95-01. 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: (Thomas Hoffmann)

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.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 profile, as there may be some citations waiting for confirmation.

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

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.