Abstract

This work studies the effects on investment and capital accumulation of a policy changing the level of taxation on firms' profits in the presence of a balanced budget constraint. In this context, the traditional conclusion that a tax reduction increases investment and capital growth is not correct since the effects of fiscal policy are ambiguous. Furthermore it is shown that the direction of these effects depends on the elasticity of private demand with respect to price and it is examined a particular case in which fiscal policy has no influence on investment decisions. The paper finally shows that the results obtained are correct even when different compositions of public expenditure are considered.