IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/2094.html
   My bibliography  Save this paper

Tax Policy and Stock Prices

Author

Listed:
  • Thomas Downs
  • Patric H. Hendershott

Abstract

Windfall profits and losses accrue to investors only when expected after-tax returns or discount rates change, and major tax policy shifts are likely to alter these variables. This study introduces a cashflow valuation model for estimating the windfalls to owners of U.S. nonfinancial corporations caused by the enactment of tax changes. The model is illustrated by analysis of two reform packages, the Treasury Proposal of November 1984 and the Tax Reform Act of 1986. We find that the original Treasury plan would have boosted stock prices by 20 to 30 percent; an increase of 10 to 12 percent is computed for the Tax Reform Act of 1986. This anomalous result -- a $125 to $140 billion dollar corporate tax increase (over five years) raising stock prices -- occurs because the tax increase is on new capital, not old capital. The stock market largely values expected returns on the existing capital stock, and these returns benefit from the adverse treatment of new investment.

Suggested Citation

  • Thomas Downs & Patric H. Hendershott, 1986. "Tax Policy and Stock Prices," NBER Working Papers 2094, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2094
    Note: ME PE
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w2094.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    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. Martin Feldstein & Lawrence Summers, 1983. "Inflation, Tax Rules, and the Long-term Interest Rate," NBER Chapters,in: Inflation, Tax Rules, and Capital Formation, pages 153-185 National Bureau of Economic Research, Inc.
    3. William C. Brainard & John B. Shoven & Laurence Weiss, 1980. "The Financial Valuation of the Return to Capital," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 11(2), pages 453-512.
    4. 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.
    5. Patric H. Hendershott, 1985. "Tax reform and financial markets," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 29, pages 153-186.
    6. Brainard, William C. & Shoven, John B., 1980. "The financial valuation of the return to capital," Proceedings, Federal Reserve Bank of San Francisco, issue 4, pages 43-104.
    7. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lyon, Andrew B., 1989. "The effect of the investment tax credit on the value of the firm," Journal of Public Economics, Elsevier, vol. 38(2), pages 227-247, March.
    2. Patric H. Hendershott, 1988. "The Tax Reform Act Of 1986 And Economic Growth," NBER Working Papers 2553, National Bureau of Economic Research, Inc.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:2094. 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: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.