IDEAS home Printed from https://ideas.repec.org/p/kud/epruwp/95-01.html
   My bibliography  Save this paper

On Financial Adjustment and Investment Booms: Lessons from Tax Reforms

Author

Listed:
  • Vesa Kanniainen
  • Jan Södersten

Abstract

The US and US tax reforms of the 1980s created tendencies in the OECD countries to cut tax rates and broaden tax bases. Though several studies have indicated the efficiency gains of such reforms, our results suggest that a policy of rate-cut-cum-base-broadening may actually reduce long-run capital formation. Moreover, given that a tax reform is anticipated, there is room for speculative investment behaviou. We suggest hence that there may be a trade-off between long-run efficiency gains and short-run costs in terms of additional volatility and increased indebtedness. Our model assumes constant returns and convex costs of adjustment. The financial and investment policy of firm is studied under various constraints on dividend policy, arising from the existing reporting conventions. It is shown that under uniform reporting requirement, an internal financial equilibrium exists and that the corporation income tax is equivalent to a cash-flow tax while under separate reporting, it is optimal to finance by debt and tax debt only. Some positive implications for international capital flows are pointed out and some normative issues are raised.

Suggested Citation

  • Vesa Kanniainen & Jan Södersten, "undated". "On Financial Adjustment and Investment Booms: Lessons from Tax Reforms," EPRU Working Paper Series 95-01, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  • Handle: RePEc:kud:epruwp:95-01
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Luis Alvarez & Vesa Kanniainen & Jan Södersten, 1999. "Why is the Corporation Tax Not Neutral?. Anticipated Tax Reform, Investment Spurts and Corporate Borrowing," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 56(3/4), pages 285-285, July.
    2. Alvarez, Luis H. R. & Kanniainen, Vesa & Sodersten, Jan, 1998. "Tax policy uncertainty and corporate investment: A theory of tax-induced investment spurts," Journal of Public Economics, Elsevier, vol. 69(1), pages 17-48, July.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kud:epruwp:95-01. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Thomas Hoffmann (email available below). General contact details of provider: https://edirc.repec.org/data/epcbsdk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.