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Do Temporary Business Tax Cuts Matter? A General Equilibrium Analysis
Author:
William Gbohoui null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2019: Issue 029
Language:
English
Publication Date:
15 Feb 2019
DOI:
https://doi.org/10.5089/9781484393895.001
ISBN:
9781484393895
ISSN:
1018-5941
Pages:
39
Keywords:
WP; proportional tax; Ricardian Equivalence; Corporate Tax Policy; Financing Friction; General Equilibrium; dividend constraint; equity issuance; dividend payment; irrelevance theorem; proportional tax tax rate; net investment effect; investment effect; dividend policy irrelevance theorem; firm investment; investment equation; financing constraint; financing decision; Stocks; Corporate income tax; Return on investment
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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.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund