The macroeconomic effects of business tax cuts with debt financing and accelerated depreciation

This paper studies the macroeconomic effects of business tax cuts using a dynamic general equilibrium model that incorporates endogenous debt and equity financing, interest deductibility, and accelerated capital depreciation. A cut in the tax rate stimulates business investment and output persistently, but the size of the effects is small. On impact, a ten percentage point permanent tax cut raises investment and output by 2 percent and 0.4 percent, respectively. The cumulative tax multiplier ranges from -0.4 in the initial year to -0.6 after ten years. The model would predict more expansionary effects without debt financing and accelerated depreciation. The multiplier of investment tax credits is larger in absolute value than the tax rate multiplier. The multiplier of depreciation allowances is much smaller on impact than at long horizons.