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Fiscal Policy, Maintenance Allowances and Expectation-Driven Business Cycles

Nicolas Dromel

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Abstract: Firms devote significant resources to maintain and repair thei existing capital. Within a real business cycle model featuring arguably small aggregate increasing returns, this paper assesses the stabilizing effects of fiscal policies with a maintenance expenditure allowance. In this setup, firms are authorized to deduct their maintenance expenditures from revenues in calculating pre-tax profits, as in many prevailing tax codes. While flat-rate taxation does not prove useful to insulate the economy from self-fulfilling beliefs, a progressive tax can render the equilibrium unique. However, we show that the required progressivity to protect the economy against sunspot-driven fluctuations is increasing in the maintenance-to-GDP ratio. Taking into account the maintenance and repair activity of firms, and the tax deductibility of the related expenditures, would then weaken the expected stabilizing properties of progressive fiscal schedules.

Keywords: Business cycles; maintenance and repair allowances; capital utilization; progressive income taxes; local indeterminacy and sunspots.; local indeterminacy and sunspots; Cycles d'affaires; maintenance et réparation du capital; utilisation du capital; déductions fiscales; imposition progressive; indétermination locale et tâches solaires. (search for similar items in EconPapers)
Date: 2009-05
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00389691v1
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Published in 2009

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Related works:
Working Paper: Fiscal Policy, Maintenance Allowances and Expectation-Driven Business Cycles (2009) Downloads
Working Paper: Fiscal Policy, Maintenance Allowances and Expectation-Driven Business Cycles (2009) Downloads
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