Fiscal Policy, Maintenance Allowances and Expectation-Driven Business Cycles

Nicolas Dromel

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

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 (search for similar items in EconPapers)
JEL-codes: D33 D58 E30 E32 E62 H20 H30 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2009-05
New Economics Papers: this item is included in nep-dge
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ftp://mse.univ-paris1.fr/pub/mse/CES2009/09031.pdf (application/pdf)

Related works:
Working Paper: Fiscal Policy, Maintenance Allowances and Expectation-Driven Business Cycles (2009)
Working Paper: Fiscal Policy, Maintenance Allowances and Expectation-Driven Business Cycles (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:09031

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