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Working Papers

October 1987, No. 87-4

The Economic Effects of Corporate Taxes in a Stochastic Growth Model

Michael Dotsey

The Economic Recovery Act of 1981 led to the largest postwar decline in effective tax rates on capital.  The legislation also had its most significant effect on rates in 1982 due to the rapid decline in inflation.  Although some of the tax cut was rescinded in 1982, effective corporate tax rates on plant and equipment, measured as the difference between before and after-tax rates on return to capital as a percentage of before-tax rates of return, remained at historically low values though 1986.    Accompanying this tax cut is the current economic recovery which began in November, 1982.  It is therefore, natural to investigate the linkages between the tax cut and the increase in economic activity.

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