Tax Reform, Investment, and the Value of the Firm

Alan J. Auerbach, James R. Hines Jr.

NBER Working Paper No. 1803
Issued in 1986
NBER Program(s):   PE

The taxation of corporate assets is well understood to influence investment and firm valuation. This paper explores the consequences of postwar U.S. tax changes in a dynamic model which incorporates costs of adjustment and investor expectations of future tax reforms and macroeconomic variability.When viewed in a dynamic context, the tax code can have very different incentives than those implied by the usual static analysis. Simulation results suggest that investment is sensitive to future tax changes and business-cycle movements. The paper also illustrates the implications of this analysis for the design of tax reforms.

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