Tax Policy and Irreversible Investment

Sumru Altug (), Fanny S. Demers and Michel Demers

CDMA Working Paper Series from Centre for Dynamic Macroeconomic Analysis

Abstract: We examine the impact of tax policy uncertainty on the irreversible investment decisions of a monopolistically competitive firm. We consider the impact of tax policy in terms of the investment tax credit (ITC) as well as the stochastic tax wedge which determines the after-tax costs of investing. We show that (i) temporary tax incentives have a greater stimulative impact on investment; (ii) greater policy volatility results in greater variability of investment; (iii) a stochastically larger future tax policy lowers current investment; and (iv) greater variability of tax policy around a constant mean leads to lower investment. We examine changes in the average levels of investment and its variability over short- and long-run horizons. We consider a general 3-state process, a log-normal process, and a Poisson process. We carry out an extensive sensitivity analysis that allows us to examine the impact of changes in real interest rates, and changes in the elasticity of demand facing firms.

Keywords: Irreversible investment; tax policy; changes in persistence; increases in risk. (search for similar items in EconPapers)
JEL-codes: E22 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc and nep-mac
Date: 2004-11
View list of references View citations in EconPapers

Downloads: (external link)
http://www.st-andrews.ac.uk/economics/CDMA/papers/wp0404.pdf (application/pdf)

Related works:
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: http://EconPapers.repec.org/RePEc:san:cdmawp:0404

Access Statistics for this paper

More papers in CDMA Working Paper Series from Centre for Dynamic Macroeconomic Analysis
Address: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL
Contact information at EDIRC.
Series data maintained by Jinyu Chen ().