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Dynamic effects of anticipated and temporary tax changes in a R&D-Based growth model

  • Kizuku Takao


    (Graduate School of Economics, Osaka University)

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    Tax changes are often announced before the implementations and are not permanent but only temporary. R&D firms will optimally adjust their investment decision to a tax schedule accordingly. This paper analyzes how anticipated and temporary tax changes dynamically affect the innovation activities. For the purpose, we consider adjustment costs for the investment process and allow firms to make a forward looking investment decision in the framework of an R&D-based endogenous growth model. Calibrating the model with U.S. data, we obtain new insights on how to design the corporate taxation policy. A dividend tax cut is not an effective policy instrument irrespective of how it is implemented. On the other hand, a capital gains tax cut and a rise of the R&D tax credit rate are an effective policy instrument irrespective of how they are implemented. However, the implementation lags of these tax changes worsen the effectiveness of them.

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    Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 14-10.

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    Length: 42 pages
    Date of creation: Feb 2014
    Date of revision:
    Handle: RePEc:osk:wpaper:1410
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