Taxes, Regulations, and the Value of U.S. and U.K. Corporations

We derive the quantitative implications of growth theory for U.S. corporate equity plus net debt over the period 1960–2001. There were large secular movements in corporate equity values relative to GDP, with dramatic declines in the 1970s and dramatic increases starting in the 1980s and continuing throughout the 1990s. During the same period, there was little change in the capital-output ratio or earnings share of output. We ask specifically whether the theory accounts for these observations. We find that it does, with the critical factor being changes in the U.S. tax and regulatory system. We find that the theory also accounts for the even larger movements in U.K. equity values relative to GDP in this period. ∗Corresponding author: Prescott, Research Department, 90 Hennepin Avenue, P.O. Box 291, Minneapolis, MN, 55480-0291, [email protected]. Data, codes, and a technical appendix are available for this paper at http://www.minneapolisfed.org/research/sr/sr309.html. We thank Andy Abel, Alan Auerbach, Bob Hall, Ravi Jagannathan, Urban Jermann, Narayana Kocherlakota, Lee Ohanian, Jim Poterba, Kathy Rolfe, Bob Shiller, four anonymous referees, and the editor for their comments. We thank Martin Weale and Shane Duffield for their help with U.K. data. We also thank the National Science Foundation for financial support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.