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Tax Neutrality and the Investment Tax Credit

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  • David F. Bradford

Abstract

This paper concerns the question of how the rules for calculating the investment tax credit and the associated rules for calculating depreciation allowances for tax purposes should be structured to assure the "appropriate" relationship between the subsidy granted to long-lived assets and that to short-lived assets. The increasing rate of tax subsidy under the investment credit favors long-lived assets by comparison with a flat-rate credit, while the neglect of the credit in calculating depreciation allowances favors short-lived assets (for which the depreciation allowance is a more important element in the cash flow). In reviewing the literature on this issue, Emil Sunley focused on the question of whether the investment credit should vary with the durability of the asset purchased. He concluded that neutrality requires a subsidy rate increasing with the useful life of the asset in a way qualitatively similar to that prescribed in present U.S. law. This paper develops Sunley's discussion through the use of simple formal models of the yield from investment.

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File URL: http://www.nber.org/papers/w0269.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0269.

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Date of creation: Dec 1980
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Publication status: published as Bradford, David F. "Tax Neutrality and the Investment Tax Credit." The Economics of Taxation, edited by Henry J. Aaron and Michael J. Boskin, pp. 281- 298. Washington, D.C.: The Brookings Institution, 1980.
Handle: RePEc:nbr:nberwo:0269

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Cited by:
  1. Don Fullerton & Andrew B. Lyon & Richard J. Rosen, 1983. "Uncertainty, Welfare Cost, and the 'Adaptability' of U.S. Corporate Taxes," NBER Working Papers 1239, National Bureau of Economic Research, Inc.
  2. Jack, William & Viard, Alan D., 1996. "Production efficiency and the design of temporary investment incentives," Journal of Public Economics, Elsevier, vol. 61(1), pages 87-106, July.
  3. Roger H. Gordon, 1981. "Taxation of Corporate Capital Income: Tax Revenues vs. Tax Distortions," NBER Working Papers 0687, National Bureau of Economic Research, Inc.
  4. Don Fullerton, 1983. "Which Effective Tax Rate?," NBER Working Papers 1123, National Bureau of Economic Research, Inc.
  5. Goolsbee, Austan, 2004. "Taxes and the quality of capital," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 519-543, March.
  6. Salike, Nimesh, 2010. "Effect of regional integration agreement on foreign direct investment : A theoretical perspective," MPRA Paper 31859, University Library of Munich, Germany.
  7. Don Fullerton & Andrew B. Lyon, 1987. "Tax Neutrality and Intangible Capital," NBER Working Papers 2430, National Bureau of Economic Research, Inc.
  8. Alan J. Auerbach, 1982. "Taxation, Corporate Financial Policy and the Cost of Capital," NBER Working Papers 1026, National Bureau of Economic Research, Inc.

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