TY  - JOUR
AU  - Hassett,Kevin
AU  - Metcalf,Gilbert E.
TI  - Investment with Uncertain Tax Policy: Does Random Tax Policy Discourage Investment?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4780
PY  - 1994
Y2  - June 1994
UR  - http://www.nber.org/papers/w4780
L1  - http://www.nber.org/papers/w4780.pdf
N1  - Author contact info:
Kevin Hassett
American Enterprise Institute
1150 Seventeenth Street, N.W.
Washington, DC 20036
E-Mail: khassett@aei.org

Gilbert E. Metcalf
Room 3221
Department of the Treasury
Washington, DC 20220
1500 Pennsylvania Ave., NW
Tel: 202-622-0173
E-Mail: gilbert.metcalf@tufts.edu
AB  - In models with irreversible investment, increasing uncertainty about prices has been shown to increase the required rate of return (hurdle rate) and delay investment (e.g., Pindyck, 1988).  One serious form of uncertainty faced by firms, a form that policy makers could conceivably control, is tax uncertainty.  In this paper, we show that it does not follow from past work that tax policy uncertainty increases the expected hurdle price ratio and delays investment.  This is because tax uncertainty has an unusual form that distinguishes it from price uncertainty: tax rates tend to remain constant for many years, and then change in large jumps.  When tax policy follows a jump process, firms' expectations of the likelihood of the jump occurring have important effects on investment.  Indeed, as we show below, while price uncertainty increases the hurdle rate and slows down investment, tax uncertainty has the opposite effect.
ER  -