Working Paper: NBER ID: w0757
Authors: Lawrence H. Summers; Michael Salinger
Abstract: This paper develops a methodology for simulating the effects of alternative corporate tax reforms on the stock market valuation and investment plans of individual firms. The methods are applied to estimate the effects of alternative corporate tax reforms on the 30 Dow Jones companies. The estimates are all based on extensions of Tobin's "q Theory of Investment" to take account of the effects of tax policy. As well as providing the basis for the estimates of the effects of tax policy, the results here provide strong microeconometric support for the q theory of investment. The q theory approach provides a superior method for estimating the effects of investment incentives because it recognizes the effects of changes in the cost of capital on the desired level of output. The results suggest that some potential tax reforms could have potent effects, which vary widely among firms. For example, complete indexation of the tax system would raise the Dow Jones average by an estimated 7.6 percent. The variance among companies is substantial with the effect ranging from -13 percent for Sears to 20 percent for American Brands.
Keywords: corporate tax reform; investment behavior; Tobin's q
JEL Codes: H25; E22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Corporate tax reforms (H29) | Investment decisions (G11) |
| Removal of tax indexing (H29) | Decrease in investment (E22) |
| Higher q ratio (C21) | Increase in investment (E22) |
| Inflation (E31) | Corporate tax burdens (H22) |
| Corporate tax burdens (H22) | Investment decisions (G11) |