Do Temporary Business Tax Cuts Matter? A General Equilibrium Analysis
Electronic Access:
Free Download. Use the free Adobe Acrobat Reader to view this PDF file
Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Summary:
This paper develops a dynamic general equilibrium model to assess the effects of temporary business tax cuts. First, the analysis extends the Ricardian equivalence result to an environment with production and establishes that a temporary tax cut financed by a future tax-increase has no real effect if the tax is lump-sum and capital markets are perfect. Second, it shows that in the presence of financing frictions which raise the cost of investment, the policy temporarily relaxes the financing constraint thereby reducing the marginal cost of investment. This direct effect implies positive marginal propensities to invest out of tax cuts. Third, when the tax is distortionary, the expectation of high future tax rates reduces the expected marginal return on investment mitigating the direct stimulative effects.
Series:
Working Paper No. 2019/029
Subject:
Corporate income tax Expenditure Financial institutions National accounts Public debt Return on investment Stocks Taxes
English
Publication Date:
February 15, 2019
ISBN/ISSN:
9781484393895/1018-5941
Stock No:
WPIEA2019029
Pages:
39
Please address any questions about this title to publications@imf.org