Investment with Uncertain Tax Policy
Does Random Tax Policy Discourage Investment
Bibliographic Data
| ID | 9707717 |
|---|---|
| Authors | Kevin A Hassett (American Enterprise Institute), Gilbert E Metcalf (Tufts University and NBER) |
| Year | 1999 |
| Volume | 109 |
| Issue | 457 |
| Pages | 372-393 |
| Publication date | 1999-07-01 |
| Peer Reviewed | Yes |
| Open Access | Yes |
| Type | ARTICLE |
| Venue | The Economic Journal (JOURNAL) |
| Journal identifiers | ISSN: 0013-0133 • E-ISSN: 1468-0297 |
| Publisher | Oxford University Press (OUP) (PUBLISHER) |
| DOI | 10.1111/1468-0297.00453 |
| OpenAlex | W2890359360 |
| Language | EN |
| Citations received | 11 |
We consider the impact of tax policy uncertainty on firm level and aggregate investment, comparing investment behavior when uncertainty is due to a shock following Geometric Brownian Motion (GBM) versus when random discrete jumps in tax policy occur. Expectations of the likelihood of a tax policy switch have an important negative impact on the gain to delaying investment in the latter model and time to investment can fall with increasing tax policy uncertainty. Aggregate investment simulations indicate that capital formation is adversely affected by increases in uncertainty in the traditional GBM model but can be enhanced in the jump process model. We also find that mean preserving spreads are attractive to firms when they have discretion over real behavior. In both models, a mean preserving spread lowers the cost of capital conditional on investment as firms shift investment from high to low cost periods. Ex ante mean preserving spreads in general lead to ex post decreases in the price of capital. We relate this 1 It is often said that nothing is certain in life except death and taxes. While death is
Economics · Gross income · Investment (military · Microeconomics · Monetary economics · Public economics · State income tax · Tax basis · Tax credit · Tax policy · Tax rate · Tax reform · Economic theories and models · Fiscal Policy and Economic Growth · Monetary Policy and Economic Impact
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| Unique citing works | 11 |
|---|---|
| Citations per year | 1 |
| Citation span | 2015 - 2025 (11) |
| Citation velocity | recent |
| Highly cited | No |
| Citation types | Neutral: 11 |