The Macroeconomic Effects of Business Tax Cuts Filippo Occhino
Coles Working Paper Series, SPRING23-04, March 2023
OVERVIEW
This paper studies the macroeconomic effects of business tax cuts using a dynamic general equilibrium model that incorporates endogenous debt and equity financing, interest deductibility, and accelerated capital depreciation. A cut in the tax rate stimulates business investment and output persistently, but the size of the effects is small: a 10 percentage point permanent tax cut raises investment and output by only 2 percent and 0.4 percent, respectively. The cumulative tax multiplier ranges from −0.4 in the initial year to −0.6 after ten years. The model predicts more expansionary effects without debt financing and accelerated depreciation. The multiplier of investment tax credits is larger in absolute value than the tax-rate multiplier, and the multiplier of depreciation allowances is much smaller at first than over time
48 | Working Papers
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