de recherche sur l ’ emploi et les fluctuations économiques ( CREFÉ ) Center for Research on Economic

This paper investigates the effects of business tax lobbying in the presence of investments that are sunk or costly to adjust in the short run. We show that industries which rely more heavily on sunk capital are generally more successful in obtaining tax breaks through lobbying; this reverses the usual logic of the capital levy problem. Nevertheless, these industries invest less in long-run equilibrium than more flexible ones. We then consider the effects of relaxing legal restrictions on corporate lobbying. When politicians give more weight to lobbyists’ preferences, taxes fall on average and investment rises. But investment is misallocated among industries, so that welfare may fall. Thus restrictions on business lobbyists may be desirable.