Irreversible Capital Accumulation and Nonlinear Tax Policy: A Note

Luis H. R. Alvarez, Erkki Koskela
2007 FinanzArchiv / Public Finance Analysis (FA)  
We analyze the impact of tax progression on optimal investment policy and its value by first demonstrating that optimal investment policy maximizes the value of the firm and the rate at which it is growing as a function of operating capital stock. Then we show that three possible optimal regimes arise depending on the nature of tax policy. If the exogenously given progression threshold lies between the optimal capital stocks in the case of higher and lower marginal profit taxes, then optimal
more » ... es, then optimal policy is independent of profit tax rates. Outside this corner solution optimal investment policy is conventional. JEL Classification: H25, H32, E22.
doi:10.1628/001522107x186719 fatcat:cazh52frifawznu6ejbh3abnmi