Financial Frictions and Stimulative Effects of Temporary Corporate Tax Cuts

40 Pages Posted: 14 Jun 2019

See all articles by William Gbohoui

William Gbohoui

International Monetary Fund (IMF)

Rui Castro

McGill University - Department of Economics

Date Written: May 2019

Abstract

This paper uses an industry equilibrium model where some firms are financially constrainedto quantify the effects of a transitory corporate tax cut funded by a future tax increase on theU.S. economy. It finds that by increasing current cash-flows tax cuts alleviate financingfrictions, hereby stimulating current investment. Per dollar of tax stimulus, aggregateinvestment increases by 26 cents on impact, and aggregate output by 3.5 cents. The averageeffect masks heterogeneity: multipliers are close to 1 for constrained firms, especially newentrants, and negative for larger and unconstrained firms. The output effects extend well pastthe period the policy is reversed, leading to a cumulative multiplier of 7.2 cents. Multipliersare significantly larger when controlling for the investment crowding-out effect amongunconstrained firms.

Keywords: Tax revenue, Business cycles, Flow of funds, Interest rate determination, Corporate income taxes, Corporate Tax Policy, Financing Frictions, Investment Dynamics, Fiscal Policy Multipliers, Firm Heterogeneity., aggregate output, corporate tax, intertemporal, new entrant, corporate taxation

JEL Classification: D21, D92, E22, E62, G35, H32, E01, G21, H2, H71, K

Suggested Citation

Gbohoui, William and Castro, Rui, Financial Frictions and Stimulative Effects of Temporary Corporate Tax Cuts (May 2019). IMF Working Paper No. 19/97. Available at SSRN: https://ssrn.com/abstract=3404080

William Gbohoui (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Rui Castro

McGill University - Department of Economics ( email )

855 Sherbrooke Street West
Montreal, QC H3A 2T7
CANADA

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