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Investment Under Tax Policy Uncertainty: A Neoclassical Approach

Department of Economics, Faculty of Economics and Political Science, Cairo University, Cairo, Egypt, ashazly{at}cics.feps.eun.eg

This article studies the impact of investment irreversibility, delivery lags, and adjustment costs on the firm’s optimal investment policy in a world of uncertainty. The source of uncertainty is a future change in the corporate profits tax where both the timing of this event and the size of associated adjustment in the tax benefit of investing are random. Such a tax uncertainty is particularly evident in reform economies whose authorities consider significant reductions in the corporate tax rate to stimulate business life. It is shown that greater transparency on tax policy promotes the firm’s expected net worth and the capital accumulation process.

Key Words: tax policy • uncertainty • investment

Public Finance Review, Vol. 37, No. 6, 732-749 (2009)
DOI: 10.1177/1091142109351565


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