Working Paper: NBER ID: w1803
Authors: Alan J. Auerbach; James R. Hines Jr.
Abstract: 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.
Keywords: tax reform; investment; firm valuation; adjustment costs
JEL Codes: H25; E22; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| postwar U.S. tax changes (N42) | investment behavior (G11) |
| postwar U.S. tax changes (N42) | firm valuation (G32) |
| taxation of corporate assets (K34) | investment incentives (O31) |
| anticipated tax changes (H26) | investment sensitivity (G11) |
| structure of adjustment costs (J30) | impact of historical policy changes on corporate market values (G38) |
| expectations about future tax changes (H32) | adjustment costs to capital stock (E22) |