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Capital Taxes with Real and Financial Frictions

Jason DeBacker ()

No 201402, Working Papers from Middle Tennessee State University, Department of Economics and Finance

Abstract: This paper studies how frictions, both real and financial, interact with capital tax policy in a dynamic, general equilibrium model with heterogeneous firms. Comparative statics show that tax policy can have substantially different effects depending upon the frictions present. Analytical and numerical exercises show that accounting for firm heterogeneity is important when evaluating the responses of economic aggregates to capital tax policy. The effects of tax cuts on allocational efficiency are found to be quantitatively significant, often accounting for the majority of the change in output following a reduction in taxes on capital.

Keywords: Corporate Finance; Firm Dynamics; Capital Taxation; Allocational Efficiency (search for similar items in EconPapers)
JEL-codes: D21 E22 G31 H25 (search for similar items in EconPapers)
Date: 2011-09
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Persistent link: https://EconPapers.repec.org/RePEc:mts:wpaper:201402

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