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Tax Policy, Asset Prices, and Growth: A General Equilibrium Analysis

  • Lawrence H. Goulder
  • Lawrence H. Summers

This paper presents a multisector general equilibrium model that is capable of providing integrated assessments of the economy's short- and long- run responses to tax policy changes. The model contains an explicit treatment of firm's investment decisions according to which producers exhibit forward- looking behavior and take account of adjustment costs inherent in the installation of new capital. This permits an examination of both short-run effects of tax policy on industry profits and asset prices as well as 1ong-term effects on capital accumulation. The model contains considerable detail on U.S. industry, corporate financial policies, and the U.S. tax system. Simulation results reveal that the effects of tax policy differ significantly depending on whether the policy is oriented toward new or old capital measures like the investment tax credit stimulate investment without conferring significant windfall gains on corporate shareholders. Corporate tax rate reductions with the same revenue cost, on the other hand, yield large windfalls to shareholders while providing only a modest stimulus to investment in plant and equipment.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2128.

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Date of creation: Jan 1987
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Publication status: published in 1986 Proceedings of the 79th Annual Conference on Taxation , Columbus: National Tax Association, 1987, pp. 119-125
Handle: RePEc:nbr:nberwo:2128
Note: PE
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  1. Don Fullerton, 1980. "Transition Losses of Partially Mobile Industry-Specific Capital," NBER Working Papers 0520, National Bureau of Economic Research, Inc.
  2. James M. Poterba & Lawrence H. Summers, 1985. "The Economic Effects of Dividend Taxation," NBER Working Papers 1353, National Bureau of Economic Research, Inc.
  3. Fair, Ray C & Taylor, John B, 1983. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 51(4), pages 1169-85, July.
  4. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  5. 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.
  6. Shoven, John B & Whalley, John, 1984. "Applied General-Equilibrium Models of Taxation and International Trade: An Introduction and Survey," Journal of Economic Literature, American Economic Association, vol. 22(3), pages 1007-51, September.
  7. John B. Shoven & John Whalley, 1972. "A General Equilibrium Calculation of the Effects of Differential Taxation of Income from Capital in the U.S," Cowles Foundation Discussion Papers 328, Cowles Foundation for Research in Economics, Yale University.
  8. James M. Poterba, 1980. "Inflation, Income Taxes, and Owner-Occupied Housing," NBER Working Papers 0553, National Bureau of Economic Research, Inc.
  9. Lawrence H. Summers, 1985. "Taxation and the Size and Composition of the Capital Stock: An Asset Price Approach," NBER Working Papers 1709, National Bureau of Economic Research, Inc.
  10. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  11. Lawrence H. Goulder & John B. Shoven & John Whalley, 1983. "Domestic Tax Policy and the Foreign Sector: The Importance of Alternative Foreign Sector Formulations to Results from a General Equilibrium Tax Analysis Model," NBER Chapters, in: Behavioral Simulation Methods in Tax Policy Analysis, pages 333-368 National Bureau of Economic Research, Inc.
  12. Ballard, Charles L. & Fullerton, Don & Shoven, John B. & Whalley, John, 2009. "A General Equilibrium Model for Tax Policy Evaluation," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226036335.
  13. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
  14. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321.
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