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Tax Reform, Investment, and the Value of the Firm

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

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.

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File URL: http://www.nber.org/papers/w1803.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1803.

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Date of creation: Jan 1986
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Handle: RePEc:nbr:nberwo:1803
Note: PE
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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. Andrew B. Abel & Olivier J. Blanchard, 1983. "The Present Value of Profits and Cyclical Movements in Investment," NBER Working Papers 1122, National Bureau of Economic Research, Inc.
  3. Auerbach, Alan J, 1979. "Inflation and the Choice of Asset Life," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 621-38, June.
  4. James M. Poterba & Lawrence H. Summers, 1981. "Dividend Taxes, Corporate Investment, and "Q"," NBER Working Papers 0829, National Bureau of Economic Research, Inc.
  5. 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.
  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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