How does the corporate income tax influence investment and saving and the real interest rate? Draw...

How does the corporate income tax influence investment and saving and the real interest rate? Draw a graph to illustrate your answer.

Solutions

Expert Solution

The relation between corporate income tax and investment demand is inversely related. If corporate taxes increases, then the returns from investments are reduced by the amout of taxation. Hence a increase in corporate tax will decrease investment demand and vice versa.

Consider the market for lonable funds. The investment function is downwards sloping i.e investment increases as interest rate falls. While savings function is upward sloping i.e higher interest rates attract savings. Now lets consider an increase in corporate taxes which shifts investment demand curve downward from I1 to I2. This causes the real interest rate to fall from r1 to r2. This leads to a fall in equilibrium amount of savings and investment. Savings decreases along the saving curve as real interest rate falls.

Hence we can conclude that corporate taxes discourage investment and savings, decreases real interest rates.

Rahul Sunny answered 1 month ago

Next > < Previous

Related Solutions

How does the corporate income tax influence the financing decisions of corporations? What impact does this...

How does the corporate income tax influence the financing decisions of corporations? What impact does this have? Who benefits under this situation?

How does a tax on interest income influence a person’s willingness to save? Can the impact...

How does a tax on interest income influence a person’s willingness to save? Can the impact of the tax on saving be unequivocally predicted from theory? Explain why or why not. Do you believe interest income should be taxed? Support your answer with a discussion of specific relevant concepts you have learned thus far in this course.

If at a given real interest rate desired national saving is $150 billion, domestic investment is...

If at a given real interest rate desired national saving is $150 billion, domestic investment is $90 billion, and net capital outflow is $70 billion, then a. the real interest rate will rise and net exports will fall. b. the real interest rate will fall and net exports will fall. c. the real interest rate will fall and net exports will rise. d. the real interest rate will rise and net exports will rise.

In a large open economy, an investment tax credit raises the real interest rate, ______ the...

In a large open economy, an investment tax credit raises the real interest rate, ______ the trade balance, and ______ net capital outflow. a. decreases; decreases b. increases; increases c. decreases; increases d. increases; decreases Assume that a war breaks out abroad, and foreign investors choose to invest more in a large safe country, the United States. Then, the U.S. real interest rate: a. and net exports will both fall. b. will fall and net exports will rise. c. will...

Explain what happens to saving, investment, and the real interest rate in each of the following scenarios in a closed economy.

Explain what happens to saving, investment, and the real interest rate in each of the following scenarios in a closed economy. Illustrate your answer using a saving-investment diagram. Label the axes and curves clearly. a) Real money supply increases b) The tax code changes so that business firms face higher tax rates on their revenue (offset by other lump-sum tax changes so there’s no overall change in tax revenue). The rise in taxes reduces desired investment, shifting the Id curve...

If the real interest rate increased while both desired saving amount and desired investment amount increased,...

If the real interest rate increased while both desired saving amount and desired investment amount increased, then both saving curve and investement curve shifted left saving curve shifted right and investment curve shifted left Saving curve shifted left neither curve shifts investment curve shifted right

Explain why and how investment depends on the real interest rate.

Year Corporate Tax Rate Interest Income Average Rate on Equity Income Dividends Capital Gains 1971-1978 48% ...

Year Corporate Tax Rate Interest Income Average Rate on Equity Income Dividends Capital Gains 1971-1978 48% 70% 53% 70% 35% 1979-1981 46% 70% 49% 70% 28% 1982-1986 46% 50% 35% 50% 20% 1987 40% 39% 33% 39% 28% 1988-1990 34% 28% 28% 28% 28% 1991-1992 34% 31% 30% 31% 28% 1993-1996 35% 40% 34% 40% 28% 1997-2000 35% 40% 30% 40% 20% 2001-2002 35% 39% 30% 39% 20% 2003-2012 35% 35% 15% 15% 15% Use the data in the table,...

If the tax rate is 40 percent, compute the before-tax real interest rate and the after-tax...

If the tax rate is 40 percent, compute the before-tax real interest rate and the after-tax real interest rate. (answer in percentages. If whole percentages, do not need decimals. If have decimals, round to nearest hundredth of percent) Show all steps clearly assume multiplying percentages by $100 before-tax real interest rate = nominal interest rate - inflation rate reduction in nominal interest = nominal interest rate multiplied by tax rate after-tax nominal interest rate = nominal interest rate - reduction...

How can the "Corporate Governance" positively influence the executives behavior, to reduce their self interest? Does...

How can the "Corporate Governance" positively influence the executives behavior, to reduce their self interest? Does "positive psychology" really works better than strict rules and regulations? Should executives/ CEO's compensations be that high, even if the company is not performing that well? Please answer the question in details!

Subjects