Tax policy and business investment

In this survey, we review research on tax policy and business investment with four objectives. First, we use a simple prototypical dynamic neoclassical investment model to derive and explain effects of taxation on business investment in the long run and short run. Second, we describe and evaluate empirical tests of neoclassical channels, and we conclude that recent empirical evidence is consistent with neoclassical intuition. Third, we explore qualifications to basic theoretical models and their empirical tests raised by recent research on irreversibility and capital-market imperfections. Finally, we evaluate arguments for and against using tax policy to influence the level or timing of investment.While there is a consensus about the nature and magnitude of tax policy on investment demand considerable uncertainty remains regarding the structure of adjustment costs and the short-run dynamic effects of tax reforms. Consistent with our analysis of equilibrium investment outcomes, ascertaining the effects of tax policy on equilibrium investment requires additional research to examine responsiveness of interest rates, output, and the stock market to tax policy changes.