Tax Policy, Asset Prices, and Growth: A General Equilibrium Analysis

Abstract

This paper presents a xnult.isectorgeneral equilibrium model that is capable of providing integrated assessments of the economy's short-and longrun responses to tax policy changes.The model contains an explicit treatment of firms' investment decisions according to which producers exhibit forwardlooking behavior and take account of adjustment costs inherent in the installation of new capital.This permits an examination of both short-run effects of tax policy on industry profit and asset prices as well as long-term effects on capital accumulation.The model contains considerable detail on U.S. industry, corporate financial policies, and the US, tax system.Simulation results reveal that the effects of tax policy differ significantly depending on whether the policy is oriented toward new or old capital.Heasures like the investment tax credit stimulate investment without conferring significant windfall gains on corporate shareholders.Corporate tax rate reductions with the same revenue cost, on the other hand, yield large windfalls to shareholders while providing only a modest stimulus to investment in plant and equipment.

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