IMF Working Papers

Do Temporary Business Tax Cuts Matter? A General Equilibrium Analysis

By William Gbohoui

February 15, 2019

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William Gbohoui. Do Temporary Business Tax Cuts Matter? A General Equilibrium Analysis, (USA: International Monetary Fund, 2019) accessed November 23, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper develops a dynamic general equilibrium model to assess the effects of temporary business tax cuts. First, the analysis extends the Ricardian equivalence result to an environment with production and establishes that a temporary tax cut financed by a future tax-increase has no real effect if the tax is lump-sum and capital markets are perfect. Second, it shows that in the presence of financing frictions which raise the cost of investment, the policy temporarily relaxes the financing constraint thereby reducing the marginal cost of investment. This direct effect implies positive marginal propensities to invest out of tax cuts. Third, when the tax is distortionary, the expectation of high future tax rates reduces the expected marginal return on investment mitigating the direct stimulative effects.

Subject: Corporate income tax, Expenditure, Financial institutions, National accounts, Public debt, Return on investment, Stocks, Taxes

Keywords: Corporate income tax, Corporate Tax Policy, Dividend constraint, Dividend payment, Dividend policy irrelevance theorem, Equity issuance, Financing constraint, Financing decision, Financing Friction, Firm investment, General Equilibrium, Investment effect, Investment equation, Irrelevance theorem, Net investment effect, Proportional tax, Proportional tax tax rate, Return on investment, Ricardian Equivalence, Stocks, WP

Publication Details

  • Pages:

    39

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2019/029

  • Stock No:

    WPIEA2019029

  • ISBN:

    9781484393895

  • ISSN:

    1018-5941

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