Tax Reform and Corporate Investment: A Microeconometric Simulation Study

60 Pages Posted: 10 Nov 2002 Last revised: 29 Jul 2010

See all articles by Michael A. Salinger

Michael A. Salinger

Boston University - Questrom School of Business

Lawrence H. Summers

Harvard University; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Date Written: September 1981

Abstract

This paper develops a methodology for simulating the effects of alternative corporate tax reforms on the stock market valuation and investment plans of individual firms. The methods are applied to estimate the effects of alternative corporate tax reforms on the 30 Dow Jones companies. The estimates are all based on extensions of Tobin's "q Theory of Investment" to take account of the effects of tax policy. As well as providing the basis for the estimates of the effects of tax policy, the results here provide strong microeconometric support for the q theory of investment. The q theory approach provides a superior method for estimating the effects of investment incentives because it recognizes the effects of changes in the cost of capital on the desired level of output. The results suggest that some potential tax reforms could have potent effects, which vary widely among firms. For example, complete indexation of the tax system would raise the Dow Jones average by an estimated 7.6 percent. The variance among companies is substantial with the effect ranging from -13 percent for Sears to 20 percent for American Brands.

Suggested Citation

Salinger, Michael A. and Summers, Lawrence H., Tax Reform and Corporate Investment: A Microeconometric Simulation Study (September 1981). NBER Working Paper No. w0757. Available at SSRN: https://ssrn.com/abstract=349143

Michael A. Salinger (Contact Author)

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
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617-353-4408 (Phone)

Lawrence H. Summers

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States
617-495-1502 (Phone)
617-495-8550 (Fax)

National Bureau of Economic Research (NBER)

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Harvard University - Harvard Kennedy School (HKS) ( email )

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Cambridge, MA 02138
United States

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