Capital Tax Reform, Corporate Finance, and Economic Growth and Welfare

Recent empirical studies have revealed a strong impact of tax changes on corporate finance. Yet, models of economic growth usually neglect financial structure of the representative firm. In order to investigate whether the consideration of firm finance modifies the estimated outcome of capital tax reforms, a corporate sector is introduced in three popular popular models of economic growth. The paper explores analytically the impact of taxation on structures of finance and production and gives a quantitative reassessment of growth and welfare effects of tax reforms in the U.S. economy. A general result is that standard models of exogenous and endogenous growth overestimate the growth effect and underestimate the welfare gain from tax reform.