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

Jianjun Miao

No wp2008-023, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

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)
Pages: 39
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Related works:
Journal Article: Corporate Tax Policy and Long-Run Capital Formation: The Role of Irreversibility and Fixed Costs (2019)
Working Paper: Corporate Tax Policy and Long-Run Capital Formation: The Role of Irreversibility and Fixed Costs (2009)
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