Why is the Corporation Tax not Neutral? Anticipated Tax not Reform, Invesment Spurts and Corporate Borrowing

Luis Alvarez, Vesa Kanniainen and Jan Södersten ()

Working Papers from Uppsala - Working Paper Series

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.

Keywords: TAXATION; DEBT; INVESTMENTS (search for similar items in EconPapers)
JEL-codes: H25 H32 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2000
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Persistent link: https://EconPapers.repec.org/RePEc:fth:uppaal:2000:4

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