Tax Reform and Corporate Investment: A Microeconometric Simulation Study

Michael Salinger and Lawrence Summers

No 757, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops a methodology for simulating the effects of alternative corporate tax reforms on the stock market valuation and investment plans of individual firms. The methods are applied to estimate the effects of alternative corporate tax reforms on the 30 Dow Jones companies. The estimates are all based on extensions of Tobin's "q Theory of Investment" to take account of the effects of tax policy. As well as providing the basis for the estimates of the effects of tax policy, the results here provide strong microeconometric support for the q theory of investment. The q theory approach provides a superior method for estimating the effects of investment incentives because it recognizes the effects of changes in the cost of capital on the desired level of output. The results suggest that some potential tax reforms could have potent effects, which vary widely among firms. For example, complete indexation of the tax system would raise the Dow Jones average by an estimated 7.6 percent. The variance among companies is substantial with the effect ranging from -13 percent for Sears to 20 percent for American Brands.

Date: 1981-09
Note: PE
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Published as Salinger, Michael A. and Lawrence H. Summers. "Tax Reform and Corporate Investment: A Microeconometric Simulation Study." Chapter 8 in Behavioral Simulation Methods in Tax Policy Analysis, ed. by Martin Feldstein. Chicago: UCP, (1983), pp. 247-281.
Published as Tax Reform and Corporate Investment: A Microeconometric Simulation Study , Michael Salinger, Lawrence H. Summers. in Behavioral Simulation Methods in Tax Policy Analysis , Feldstein. 1983

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