CAPITAL TAX REFORMS WITH POLICY UNCERTAINTY

Arpad J Abraham*, Pavel Brendler, Eva Carceles-Poveda

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)peer-review

Abstract

One important feature of capital tax reforms is the uncertainty regarding their duration. In a standard heterogeneous firm framework with financial frictions, we model policy uncertainty by assuming that reforms may be either repealed or maintained with some probability every period. We illustrate the effects of policy uncertainty in the context of the 2003 Bush tax cuts (2003 Job Growth Tax Relief Reconciliation Act), which lowered shareholder taxes. We show that policy uncertainty regarding dividend and capital gains taxes can explain why the Bush tax cuts had no statistically significant effect on investment, in line with the empirical evidence.
Original languageEnglish
Pages (from-to)75-116
Number of pages42
JournalInternational Economic Review
Volume65
Issue number1
Early online date2 Sept 2023
DOIs
Publication statusPublished - 1 Feb 2024

Bibliographical note

Publisher Copyright:
© 2023 The Authors. International Economic Review published by Wiley Periodicals LLC on behalf of the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Keywords

  • Macroeconomic Policy
  • Taxation of Capital Income
  • Policy Uncertainty

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