Working Paper: NBER ID: w2579
Authors: Jeffrey I. Bernstein; M. Ishaq Nadiri
Abstract: In this paper we develop a general intertemporal model of production, emphasizing the role of present and expected future corporate income taxes, credits and allowances along with costly adjustment and variable utilization of the quasi-fixed factors. Three specific issues are considered: 1) the direct and indirect effects of taxes operating through factor prices on the long-run input substitution, thus altering the structure of the production process; 2) the effects of tax policy changes on the rate and direction of technological change; and 3) the effects of tax policy on the inter- temporal pattern of substitutions and complementarities among the inputs that arise due to presence of quasi-fixity of some inputs. The rates of utilization of the quasi-fixed factors are determined in the short-run in conjunction with the demands for the variable factors of production. Hence, utilization rates depend on product and factor prices and therefore on tax policy. We specialize the general model in order to highlight each of the three themes and their interaction with tax policy. We also discuss the various ways in which empirical implementation of the theoretical models and a brief summary of the empirical results in the literature is also provided. Lastly, we discuss some policy implications which emerge from the analysis and empirical results.
Keywords: Corporate Taxes; Production Structure; Technological Change; Factor Substitution
JEL Codes: H25; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Corporate tax rates (H25) | Production costs (D24) |
| Production costs (D24) | Output levels (Y10) |
| Corporate tax rates (H25) | Output levels (Y10) |
| Tax policy changes (H29) | Rate of technological change (O33) |
| Tax policy changes (H29) | Direction of technological change (O33) |
| Tax policy (H29) | Intertemporal pattern of substitutions among inputs (D15) |
| Quasifixed factors (D24) | Dynamic adjustment process (C69) |