Working Paper: NBER ID: w2103
Authors: Alan J. Auerbach
Abstract: This paper derives analytical measures of the combined effects of tax changes and adjustment costs on investment and market value. Unlike earlier measures, the effective tax rate derived is valid in the presence of adjustment costs and anticipated tax changes. The derived measure of the impact of tax changes on market value permits one to estimate the effects of various tax changes on market value and its components, discounted pure profits and normal returns to capital, and to decompose changes in the value of capital into changes in the marginal value of new capital and changes in the relative value of new and existing capital. These measures are used to evaluate tax changes similar to those introduced by the recent U.S. tax reform.
Keywords: tax reform; investment; market value; adjustment costs
JEL Codes: H25; H32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Anticipated tax changes (H26) | current investment decisions (G11) |
| Future corporate tax cut (H32) | increase in investment (E22) |
| Anticipated increase in investment tax credit (G31) | decrease in current investment (E22) |
| Tax policies that encourage investment (H32) | increase in marginal price of capital (E22) |
| Increase in marginal price of capital (E22) | change in firm value (G32) |
| Tax changes (H29) | components of market value (D46) |