Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 1997:5: Tax Policy Uncertainty and the Corporation - Theory of Tax-induced Investment Spurts

Luis H.R. Alvarez, Vesa Kanniainen and Jan Södersten ()
Additional contact information
Luis H.R. Alvarez: University of Turku, Postal: Institute of Applied Mathematics, FIN-20014 Turku, Finland
Vesa Kanniainen: University of Helsinki, Postal: Department of Economics, P.O. Box 54, FIN-00014 Helsinki, Finland,
Jan Södersten: Department of Economics, Postal: Uppsala University, Box 513, SE-751 20 Uppsala, Sweden

Abstract: January 1997The anticipatory effects of a corporate tax reform of the tax-cut-cum-base-broadening variety are analysed in a dynamic stochastic adjustmentmodel of firm behavior, focusing on the case where the firm is uncertain both about the timing and the contents of the expected reform. The value of the firm is solved prior to and after the reform. The existence of investment spurts prior to the implementation of the tax reform is established. Rigorous results are derived under constant returns and the effects of diminishing returns are explained. The expectation of a future tax cut causes the firm to accelerate optimal investment, while the expectation of a reduction in the tax base (the rate of fiscal depreciation) has the opposite effect. For a firm which updates information, timing uncertainty interacts with the expectation effect; moreover, increased timing uncertainty may accelerate or decelerate investment as an optimal response to an expected tax cut. Furthermore, for reasonable assumptions, it is shown that a rate cut cum base broadening tax reform of the type implemented in several OECD-countries in the 1980’s and 1990’s cannot be revenue neutral.

Keywords: Corporate taxation; investment incentives; uncertain tax policy; stochastic adjustment

JEL-codes: H25; H32

28 pages, January 5, 1997

Download statistics

Questions (including download problems) about the papers in this series should be directed to Ulrika Öjdeby ()
Report other problems with accessing this service to Sune Karlsson ().

This page generated on 2024-02-05 17:14:00.