Do Temporary Business Tax Cuts Matter? A General Equilibrium Analysis
IMF Working Papers, February 15, 2019
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- Do Temporary Business Tax Cuts Matter? A General Equilibrium Analysis
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Bibliographic details
- Authors: William Gbohoui
- Published: February 15, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484393895.001
Summary of approach
- Develops a dynamic general equilibrium model to assess the effects of temporary business tax cuts.
- Extends the Ricardian equivalence result to an environment with production.
- Analyzes cases with perfect capital markets and with financing frictions that raise the cost of investment.
- Investigates the role of distortionary taxes and expectations of future tax rates on investment incentives.
Main findings
- Ricardian-equivalence extension:
- 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.
- Financing-frictions case:
- 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.
- Distortionary-tax case:
- When the tax is distortionary, the expectation of high future tax rates reduces the expected marginal return on investment, mitigating the direct stimulative effects.
Policy implications
- Temporary business tax cuts are ineffective in altering real outcomes under lump-sum taxation and perfect capital markets (Ricardian equivalence holds).
- Temporary tax cuts can stimulate investment when financing frictions are present by lowering the effective marginal cost of investment through a temporary relaxation of financing constraints.
- The presence of distortionary taxation and expectations of future high tax rates can offset or blunt the stimulative investment effects of temporary tax cuts.
Publication and metadata
- Author: William Gbohoui
- Publication date: February 15, 2019
- Series: Working Paper No. 2019/029
- Issue: 029
- Volume: 2019
- Pages: 39
- DOI: https://doi.org/10.5089/9781484393895.001
- Stock No: WPIEA2019029
- ISBN: 9781484393895
- ISSN: 1018-5941
- Citation format shown on page: William Gbohoui. "Do Temporary Business Tax Cuts Matter? A General Equilibrium Analysis", IMF Working Papers 2019, 029 (2019), accessed 9/9/2026, https://doi.org/10.5089/9781484393895.001
IMF Working Papers: Do Temporary Business Tax Cuts Matter? A General Equilibrium Analysis — William Gbohoui (February 15, 2019).
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