Investment Versus Savings Incentives: The Size of the Bang for the Buck and the Potential for Self-Financing Business Tax Cuts
AbstractThis paper examines the closed economy effects of government policies that vary with respect to whether they treat newly produced capital differently from old capital. Policies that do make this distinction are denoted investment policies, while those that do not are labelled savings policies. While both types of policies alter marginal incentives to accumulate new capital, investment incentives can generate significant inframarginal redistribution from current holders of wealth to those with small or zero claims on the existing capital stock. Among the principal findings, based on simulations of a general equilibrium, perfect foresight, overlapping generations life-cycle model, are:1)Investment incentives, even if financed by short run increases in the stock of debt, significantly increase capital formation.2)Deficit-financed savings incentives, in contrast, typically reduce the economy's long run capital stock.3)Deficit-financed investment incentives can actually be self-financing,in that they may lead to a long run surplus without any increase in other tax rates.
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Bibliographic InfoPaper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 652.
Length: 44 pages
Date of creation: Nov 1982
Date of revision:
Publication status: Published in Laurence H. Meyer (ed.), The Economic Consequences of Government Deficits, Kluwer, 1983
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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
Other versions of this item:
- Alan J. Auerbach & Laurence J. Kotlikoff, 1983. "Investment versus Savings Incentives: The Size of the Bang for the Buck and the Potential for Self-Financing Business Tax Cuts," NBER Working Papers 1027, National Bureau of Economic Research, Inc.
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