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Tax Reform, Investment, and the Value of the Firm

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  • Alan J. Auerbach
  • James R. Hines Jr.

Abstract

The taxation of corporate assets is well understood to influence investment and firm valuation. This paper explores the consequences of postwar U.S. tax changes in a dynamic model which incorporates costs of adjustment and investor expectations of future tax reforms and macroeconomic variability.When viewed in a dynamic context, the tax code can have very different incentives than those implied by the usual static analysis. Simulation results suggest that investment is sensitive to future tax changes and business-cycle movements. The paper also illustrates the implications of this analysis for the design of tax reforms.

Suggested Citation

  • Alan J. Auerbach & James R. Hines Jr., 1986. "Tax Reform, Investment, and the Value of the Firm," NBER Working Papers 1803, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1803
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    References listed on IDEAS

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    1. Alan J. Auerbach & Laurence J. Kotlikoff, 1982. "Investment versus Savings Incentives: The Size of the Bang for the Buck and the Potential for Self-Financing Business Tax Cuts," NBER Working Papers 1027, National Bureau of Economic Research, Inc.
    2. Feldstein, Martin & Dicks-Mireaux, Louis & Poterba, James, 1983. "The effective tax rate and the pretax rate of return," Journal of Public Economics, Elsevier, vol. 21(2), pages 129-158, July.
    3. Auerbach, Alan J, 1979. "Inflation and the Choice of Asset Life," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 621-638, June.
    4. Abel, Andrew B & Blanchard, Olivier J, 1986. "The Present Value of Profits and Cyclical Movements in Investment," Econometrica, Econometric Society, vol. 54(2), pages 249-273, March.
    5. Poterba, James M. & Summers, Lawrence H., 1983. "Dividend taxes, corporate investment, and `Q'," Journal of Public Economics, Elsevier, vol. 22(2), pages 135-167, November.
    6. 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.
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    Citations

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    Cited by:

    1. Baley, Isaac & Blanco, Andres, 2022. "The Long-Run Effects of Corporate Tax Reforms," CEPR Discussion Papers 16936, C.E.P.R. Discussion Papers.
    2. Alan J. Auerbach & James R. Hines, Jr., 1987. "Anticipated Tax Changes and the Timing of Investment," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 163-200, National Bureau of Economic Research, Inc.
    3. Goulder, Lawrence H. & Summers, Lawrence H., 1989. "Tax policy, asset prices, and growth : A general equilibrium analysis," Journal of Public Economics, Elsevier, vol. 38(3), pages 265-296, April.
    4. Alan J. Auerbach & David Reishus, 1986. "Taxes and the Merger Decision: An Empirical Analysis," NBER Working Papers 1855, National Bureau of Economic Research, Inc.
    5. Kotlikoff, Laurence J. & Summers, Lawrence H., 1987. "Tax incidence," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 16, pages 1043-1092, Elsevier.
    6. Roger H. Gordon & James R. Hines, Jr. & Lawrence H. Summers, 1987. "Notes on the Tax Treatment of Structures," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 223-258, National Bureau of Economic Research, Inc.
    7. Isaac Baley & Andrés Blanco, 2022. "The Macroeconomics of Partial Irreversibility," Working Papers 1312, Barcelona School of Economics.
    8. Skinner, Jonathan, 1988. "The welfare cost of uncertain tax policy," Journal of Public Economics, Elsevier, vol. 37(2), pages 129-145, November.
    9. David F. Bradford & Charles Stuart, 1986. "Issues in the Measurement and Interpretation of Effective Tax Rates," NBER Working Papers 1975, National Bureau of Economic Research, Inc.
    10. Auerbach, Alan J, 1989. "Tax Reform and Adjustment Costs: The Impact on Investment and Market Value," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 939-962, November.

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