Why is the Corporation Tax Not Neutral?. Anticipated Tax Reform, Investment Spurts and Corporate Borrowing

Luis Alvarez, Vesa Kanniainen and Jan Södersten ()

FinanzArchiv: Public Finance Analysis, 1999, vol. 56, issue 3/4, 285-

Abstract: The paper shows that a corporate tax policy which is thought to be neutral may have significant incentive effects. This result is established in a model with tax advantage to debt and expectations about a forthcoming tax reform. Investment spurt effects are established and compared to those of a firm with equity finance. A tax-cut cum base-broadening tax reform which leaves the long-run investment incentives of an all-equity firm unaffected is shown to cause a substantial short run investment hike. The findings are illustrated by numerical simulations indicating the magnitudes of the spurt effects.

Date: 1999
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Working Paper: Why is the Corporation Tax Not Neutral? Anticipated Tax Reform, Investment Spurts and Corporate Borrowing (2000)
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