Corporate Tax Policy and Long-Run Capital Formation: The Role of Irreversibility and Fixed Costs

Annals of Economics and Finance, 2019, vol. 20, issue 1, 67-101

Abstract: This paper presents an analytically tractable continuous-time general equilibrium model with investment irreversibility and fixed adjustment costs. In the model, there is a continuum of firms that are subject to idiosyncratic shocks to capital. Although the presence of investment frictions lowers consumer welfare, it may raise or reduce the long-run average capital stock, depending on the degree of idiosyncratic uncertainty. An increase in this uncertainty may raise equilibrium aggregate capital, but reduce welfare. An unexpected permanent change in the corporate income tax rate affects the investment trigger and target values, and hence the size and rate of capital adjustment. Following this tax policy, the percentage changes in equilibrium quantities are larger when fixed adjustment costs are larger. These changes are significantly smaller in a general equilibrium model than in a partial equilibrium model.

Keywords: Irreversibility; Fixed costs; Heterogeneity; Tax policy; General equilibrium (search for similar items in EconPapers)
JEL-codes: D92 E22 E62 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://down.aefweb.net/AefArticles/aef200103Miao.pdf (application/pdf)

Related works:
Working Paper: Corporate Tax Policy and Long-Run Capital Formation: The Role of Irreversibility and Fixed Costs (2009)
Working Paper: Corporate Tax Policy and Long-Run Capital Formation: The Role of Irreversibility and Fixed Costs
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2019:v:20:i:1:miao

Access Statistics for this article

Annals of Economics and Finance is currently edited by Heng-fu Zou

More articles in Annals of Economics and Finance from Society for AEF Contact information at EDIRC.
Bibliographic data for series maintained by Qiang Gao ().