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Capital Taxes with Real and Financial Frictions

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  • Jason M. DeBacker

Abstract

This paper studies how frictions, both real and financial, interact with capital tax policy in a dynamic, general equilibrium model with heterogeneous firms. Comparative statics show that tax policy can have substantially different effects depending upon the frictions present. Analytical and numerical exercises show that accounting for firm heterogeneity is important when evaluating the responses of economic aggregates to capital tax policy. The effects of tax cuts on allocational efficiency are found to be quantitatively significant, often accounting for the majority of the change in output following a reduction in taxes on capital.

Suggested Citation

  • Jason M. DeBacker, 2011. "Capital Taxes with Real and Financial Frictions," Working Papers 201402, Middle Tennessee State University, Department of Economics and Finance.
    • Handle: RePEc:mts:wpaper:201402
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    File URL: http://capone.mtsu.edu/berc/working/CapTax_final.pdf
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    References listed on IDEAS

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    Cited by:

    1. Anagnostopoulos, Alexis & Cárceles-Poveda, Eva & Lin, Danmo, 2012. "Dividend and capital gains taxation under incomplete markets," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 599-611.

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    More about this item

    Keywords

    Corporate Finance; Firm Dynamics; Capital Taxation; Allocational Efficiency;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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