Lumpy Investment and Corporate Tax Policy

Posted: 7 Feb 2010

See all articles by Pengfei Wang

Pengfei Wang

Peking University HSBC Business School

Jianjun Miao

Boston University - Department of Economics

Date Written: November 5, 2009

Abstract

This paper studies the impact of corporate tax policy on the economy in the presence of both convex and nonconvex capital adjustment costs in a dynamic general equilibrium model. We show that corporate tax policy generates both intensive and extensive margin effects via the channel of marginal Q. Its impact is determined largely by the strength of the extensive margin effect, which in turn depends on the cross-sectional distribution of firms. Depending on the initial distribution of firms, the economy displays asymmetric responses to tax changes. We also show that an anticipated decrease in the future corporate income tax rate raises investment and adjustment rate immediately, while an anticipated increase in the future investment tax credit reduces investment and adjustment rate initially. Our general equilibrium analysis demonstrates that a partial equilibrium analysis of tax policy can be quite misleading both quantitatively and qualitatively.

Keywords: generalized (S,s) rule, lumpy investment, general equilibrium, marginal Q, tax policy, adjustment costs

JEL Classification: E22, E62, H32

Suggested Citation

Wang, Pengfei and Miao, Jianjun, Lumpy Investment and Corporate Tax Policy (November 5, 2009). Available at SSRN: https://ssrn.com/abstract=1548624

Pengfei Wang (Contact Author)

Peking University HSBC Business School ( email )

Jianjun Miao

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-353-6675 (Phone)

HOME PAGE: http://people.bu.edu/miaoj

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