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Tax Changes and Capital Allocation in the 1980s

In: The Effects of Taxation on Capital Accumulation

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  • Patric H. Hendershott

Abstract

The paper begins with presentation of a methodology for computing rental costs of capital under any tax regime.Tax law over the 1980-84 period is specified and the provisions of theTreasury and Administration tax reform proposals and HR 3838 are described. A model is then constructed to allow calculation of the impact of changes in tax regimes and/or expected inflation on interest rates and the allocation of real capital. The model allocates a fixed private capital stock among various classes of nonresidential and residential capital, depending upon the rental costs for the capital components, the price elasticities of demand with respect to the rental costs, and the elasticities of homeownership with respect to the cost of owning versus renting. The interest rate adjusts in response to tax/inflation changes so as to maintain the aggregate demand for capital at this initial level.The model is employed to deduce the efficiency of the allocation of real capital under various tax regimes at different inflation rates.

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This chapter was published in:

  • Martin Feldstein, 1987. "The Effects of Taxation on Capital Accumulation," NBER Books, National Bureau of Economic Research, Inc, number feld87-1, October.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11351.

    Handle: RePEc:nbr:nberch:11351

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    1. Constantinides, George M. & Ingersoll, Jonathan Jr., 1984. "Optimal bond trading with personal taxes," Journal of Financial Economics, Elsevier, Elsevier, vol. 13(3), pages 299-335, September.
    2. Alan J. Auerbach, 1983. "Corporate Taxation in the United States," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 451-514.
    3. Patric H. Hendershott & Joel Slemrod, 1982. "Taxes and the User Cost of Capital for Owner-Occupied Housing," NBER Working Papers 0929, National Bureau of Economic Research, Inc.
    4. Jeremy I. Bulow & Lawrence H. Summers, 1982. "The Taxation of Risky Assets," NBER Working Papers 0897, National Bureau of Economic Research, Inc.
    5. King, Mervyn A., 1980. "An econometric model of tenure choice and demand for housing as a joint decision," Journal of Public Economics, Elsevier, Elsevier, vol. 14(2), pages 137-159, October.
    6. Berndt, Ernst R, 1976. "Reconciling Alternative Estimates of the Elasticity of Substitution," The Review of Economics and Statistics, MIT Press, vol. 58(1), pages 59-68, February.
    7. Mervyn A. King, 1980. "An econometric model of tenure choice and demand for housing as a joint decision," NBER Chapters, in: Econometric Studies in Public Finance, pages 137-159 National Bureau of Economic Research, Inc.
    8. Titman, Sheridan D, 1982. " The Effects of Anticipated Inflation on Housing Market Equilibrium," Journal of Finance, American Finance Association, American Finance Association, vol. 37(3), pages 827-42, June.
    9. Don Fullerton, 1985. "The Indexation of Interest, Depreciation, and Capital Gains: A Model ofInvestment Incentives," NBER Working Papers 1655, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Dietz, Robert D. & Haurin, Donald R., 2003. "The social and private micro-level consequences of homeownership," Journal of Urban Economics, Elsevier, vol. 54(3), pages 401-450, November.

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