Investment with uncertain tax policy: Does random tax policy discourage investment?

We consider the impact of tax policy uncertainty on firm level and aggregat e investment, comparing investment behaviour when uncertainty is due to a s hock following Geometric Brownian Motion (GBM) versus when random discrete jumps in tax policy occur. Expectations of the likelihood of a tax policy s witch have an important negative impact on the gain to delaying investment in the latter model and time to investment can fall with increasing tax pol icy uncertainty. Aggregate investment simulations indicate that capital for mation is adversely affected by increases in uncertainty in the traditional GEM model but can be enhanced in the jump process model.