Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/27215
Authors: 
Strulik, Holger
Trimborn, Timo
Year of Publication: 
2008
Series/Report no.: 
Discussion papers // School of Economics and Management of the Hanover Leibniz University 406
Abstract: 
Macroeconomic studies of tax policy in dynamic general equilibrium usually assume that reforms hit the economy unexpectedly and last forever. Here, we explore how previous results change when we allow policy changes to be pre-announced and of finite duration and when these facts are anticipated by households and firms. Quantitatively we demonstrate a headstart advantage from pre-announcement that is never caught up by a surprising reform. The welfare gain from announcement of a corporate tax cut, for example, is estimated to be around 10 percent of the total gain from the reform. We show that adjustment dynamics of important variables like firm value, dividend payout, and investment differs qualitatively depending on whether the reform comes expected or not. We are also able to demonstrate a genuine welfare gain from temporary tax cuts. Impulse responses generated by our numerical method can be retraced by phase diagram analysis which facilitates explanation and interpretation of the produced results.
Subjects: 
Tax reform
anticipation effects
investment
economic growth
welfare
corporate finance
capital taxation
JEL: 
H20
H30
E62
O40
Document Type: 
Working Paper

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