Working Paper: NBER ID: w2128
Authors: Lawrence H. Goulder; Lawrence H. Summers
Abstract: 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.
Keywords: Tax Policy; Asset Prices; Economic Growth; General Equilibrium Model
JEL Codes: H21; H25; E22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax policies oriented towards new capital (F38) | stimulate investment (E22) |
| corporate tax rate reductions (K34) | large windfalls to shareholders (G35) |
| corporate tax rate reductions (K34) | modestly stimulate investment in plant and equipment (E22) |
| unannounced corporate tax cuts (H29) | benefit corporate sectors (G30) |
| unannounced corporate tax cuts (H29) | expense noncorporate sectors (H59) |
| tax policy changes (H29) | significant variations in industry profit (L19) |
| tax policy changes (H29) | significant variations in asset prices (G19) |
| tax policy changes (H29) | long-term effects on capital accumulation (E22) |
| tax policies targeting new capital (F38) | different effects than those targeting old capital (D29) |
| increased capital intensity and productivity (E22) | benefit all industries in the long run (L59) |