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Tax Policy and Corporate Investment

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  • Lawrence H. Summers

Abstract

This paper overviews the issues connected with proposals to spur investment using tax incentives. There are four main conclusions: (1) The rate of net capital formation in the U.S. has declined very substantially. This decline has been associated with a sharp fall in the after tax return to investors in the corporate sector. (2) Increasing the share of output devoted to business capital formation would not have a large effect on the rate of productivity growth, inflation or employment. However, it would contribute substantially to intertemporal economic efficiency. The welfare gains achievable through investment incentives approach $100 billion. (3) Measures to spur investment are likely to have substantial effects. The lags are, however, very long. For example, it is estimated that the elimination of capital gains taxes would raise the capital stock by 29 percent in the long run, but by only 4 percent within five years. (4) Through judicious design of tax policy, it is possible to spur investment with only a small revenue cost. It is crucial to take account of the effect of anticipated policy on the level of investment. Traditional Keynesian econometric approaches are ill-suited to this goal.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0605.

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Date of creation: Dec 1980
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Publication status: published as Summers, Lawrence H. "Tax Policy and Corporate Investment," The Supply-Side Effects of Economic Policy, pp. 115-148. St. Louis: Federal Reserve Bank of St. Louis, 1981.
Handle: RePEc:nbr:nberwo:0605

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  1. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S3-27, April.
  2. Feldstein, Martin, 1980. "Tax Rules and the Mismanagment of Monetary Policy," American Economic Review, American Economic Association, vol. 70(2), pages 182-86, May.
  3. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  4. Michael J. Boskin, 1978. "Taxation, Saving, and the Rate of Interest," NBER Chapters, in: Research in Taxation, pages 3-27 National Bureau of Economic Research, Inc.
  5. Don Fullerton & A. Thomas King & John B. Shoven & John Whalley, 1980. "Static and Dynamic Resource Allocation Effects of Corporate and PersonalTax Integration in the U.S.: A General Equilibrium Approach(Rev)," NBER Working Papers 0337, National Bureau of Economic Research, Inc.
  6. J. R. Norsworthy & Michael J. Harper & Kent Kunze, 1979. "The Slowdown in Productivity Growth: Analysis of Some Contributing factors," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 10(2), pages 387-422.
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