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Welfare Effects of Investment Incentive Policies: A Quantitative Assessment

  • Hans Fehr

This paper deals with the intergenerational incidence of corporate tax policies in the overlapping generation model. Corporate tax reforms affect the welfare levels of individuals via three channels: (i) changes in the net tax burdens, (ii) changes in the factor prices, and (iii) changes in deadweight loss associated with the taxes. We develop formulas to isolate these effects in a closed and a small open economy and then apply these formulas to a policy experiment similar to a recent German corporate tax reform plan. The simulations suggest that generations' utility changes are mainly due to intergenerational income effects. While in closed economies changes in net tax burdens are most important especially in the short-run, the revaluation of the initial capital stock is an important redistribution channel in the small open economy.

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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 95-19.

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Handle: RePEc:kud:epruwp:95-19
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  1. Ho, Kong Weng & Hoon, Hian Teck, 1995. "Macroeconomic shocks and the endogenous response of the stock market and real interest rates in a neoclassical general equilibrium model," Economic Modelling, Elsevier, vol. 12(1), pages 28-34, January.
  2. Mayer, Colin & Alexander, Ian, 1990. "Banks and securities markets: Corporate financing in Germany and the United Kingdom," Journal of the Japanese and International Economies, Elsevier, vol. 4(4), pages 450-475, December.
  3. Goulder, Lawrence H. & Thalmann, Philippe, 1993. "Approaches to efficient capital taxation : Leveling the playing field vs. living by the golden rule," Journal of Public Economics, Elsevier, vol. 50(2), pages 169-196, February.
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