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Accelerated Depreciation and the Efficacy of Temporary Fiscal Policy: Implications for an Inflationary Economy

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  • Andrew B. Abel

Abstract

The effect on investment of temporary tax rate changes depends on the age profile of depreciation deduct ions. If the depreciation allowance schedule is accelerated, then temporary cuts in the corporate tax rate could reduce investment. Inflation causes the age profile of real depreciation deductions to become accelerated and thus could make temporary tax cuts have a contractionary effect on investment. Two currently proposed reforms are shown to exacerbate this effect. Under these proposals, temporary tax cuts are likely to have opposite effects on investment in short-lived and long-lived capital, thereby complicating the conduct of countercyclical fiscal policy.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0596.

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Date of creation: Dec 1980
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Publication status: published as Abel, Andrew B. "Accelerated Depreciation and the Efficacy of Temporary Fiscal Policy: Implications for an Inflationary Economy." Journal of Public Economics, Vol. 19, (1982), pp. 23-47.
Handle: RePEc:nbr:nberwo:0596

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  1. Abel, Andrew B, 1981. "Taxes, Inflation, and the Durability of Capital," Journal of Political Economy, University of Chicago Press, vol. 89(3), pages 548-60, June.
  2. Eisner, Robert, 1969. "Fiscal and Monetary Policy Reconsidered," American Economic Review, American Economic Association, vol. 59(5), pages 897-905, December.
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Cited by:
  1. Gürtler, Marc & Sieg, Gernot, 2006. "Crunch time: The optimal policy to avoid the "Announcement Effect" when terminating a subsidy," Working Papers FW24V2, Technische Universität Braunschweig, Institute of Finance.

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