Financial Frictions and Stimulative Effects of Temporary Corporate Tax Cuts
40 Pages Posted: 14 Jun 2019
Date Written: May 2019
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: Suggested Citation