Firm Investment, Corporate Finance, and Taxation [electronic resource] / Geremia Palomba.
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TextSeries: IMF Working Papers; Working Paper ; No. 02/237Publication details: Washington, D.C. : International Monetary Fund, 2002Description: 1 online resource (45 p.)ISBN: 145187572X :ISSN: 1018-5941Subject(s): Business Taxes and Subsidies Including Sales and Value-Added (Vat) | Corporate Income Taxation | Corporate Taxation | Cost of Capital | Firm Investment | Fiscal Policies and Behavior of Economic Agent | Jersey | United StatesAdditional physical formats: Print Version:: Firm Investment, Corporate Finance, and TaxationOnline resources: IMF e-Library | IMF Book Store Abstract: This paper examines the intertemporal effect of corporate income taxation on the investment behavior of a firm that faces imperfect capital markets. It shows that when capital markets are imperfect, the optimizing firm goes through different phases of growth. In this dynamic setting, the effect of a corporate tax on profits varies over time. An increase in the corporate profit tax rate initially reduces investment, but the effect is reversed over time as the firm adjusts its financing policy to the new tax rate.
This paper examines the intertemporal effect of corporate income taxation on the investment behavior of a firm that faces imperfect capital markets. It shows that when capital markets are imperfect, the optimizing firm goes through different phases of growth. In this dynamic setting, the effect of a corporate tax on profits varies over time. An increase in the corporate profit tax rate initially reduces investment, but the effect is reversed over time as the firm adjusts its financing policy to the new tax rate.
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