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

Luis Alvarez , Vesa Kanniainen and Jan Södersten ()
Additional contact information
Luis Alvarez : Institute of Applied Mathematics, Postal: University of Turku, FIN-20014 Turku, Finland

No 2000:4, Working Paper Series from Uppsala University, Department of Economics

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: Tax neutrality; Tax reform; Investment spurts; Debt finance (search for similar items in EconPapers)
JEL-codes: H25 H32 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2000-02-15
New Economics Papers: this item is included in nep-fin, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published in FinanzArchiv, 1999, pages 285-309.

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Related works:
Journal Article: Why is the Corporation Tax Not Neutral?. Anticipated Tax Reform, Investment Spurts and Corporate Borrowing (1999)
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