Consider the q theory model of investment presented in class. Add to the model taxes on corporate profits at rate τ , so that after-tax profits for a capital stock K are (1 - τ )Π(K). Suppose that the economy starts off at a steady state. It is announced at date t that there may be a change in corporate tax policy on a future date.
Specifically, on date s, a coin will be flipped to decide whether to keep the tax rate constant or to raise it. If it is decided to raise taxes, the change will take place immediately. Describe what happens to q and to investment in response to this situation.