BUSINESS CYCLES WITH DISTORTING TAXES AND DISAGGREGATED CAPITAL-MARKETS

This paper studies a neoclassical growth model to examine the linkages between distorting corporate and personal taxes and cyclical movements of aggregates such as investments in equipment and structures. Suppose tax variables vary stochastically and annually, We solve quarterly individual and aggregate decision rules by recursive methods and quantify the dynamic impacts on aggregates from unit changes in tax structures, and individual and joint tax specifications. The findings suggest that corporate income tax is the major factor leading to substantial tax effects on business cycles. Moreover, the impact of investment tax credit for equipment on disaggregated investments is equally significant.