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Issues in the Design of Saving and Investment Incentives

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  • David F. Bradford

Abstract

This paper examines the characteristics of and interactions among measures to effect saving and investment incentives ("S-I incentives")in the context of an income tax system that is inadequately indexed for inflation. Examples are proposals for more rapid depreciation of buildings and equipment and proposals to exempt larger amounts of interest income. SI incentives are classified into "consumption tax" and "direct grant" types, and it is shown that these differ in their influence on portfolio choices, in their sensitivity to inflation and in the design problems they present. Stress is placed on requirements for neutrality with respect to asset durability and portfolio composition. A new result is the derivation of the reduction in interest taxation yielding neutrality in the presence of partial expensing of real investment or equivalent investment incentive.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0637.

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Date of creation: Feb 1981
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Publication status: published as Bradford, David F. "Issues in the Design of Saving and Investment Incentives." Depreciation and the Taxation of Income from Capital, edited by Charles R. Hulten, pp. 13-47. Washington, D.C.: The UrbanInstitute Press, 1981.
Handle: RePEc:nbr:nberwo:0637

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References

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  1. Aaron, Henry J, 1976. "Inflation and the Income Tax," American Economic Review, American Economic Association, American Economic Association, vol. 66(2), pages 193-99, May.
  2. Alan J. Auerbach & Martin Feldstein, 1978. "Inflation and the Choice of Asset Life," NBER Working Papers 0253, National Bureau of Economic Research, Inc.
  3. Roger H. Gordon, 1980. "Inflation, Taxation, and Corporate Behavior," NBER Working Papers 0588, National Bureau of Economic Research, Inc.
  4. Fabricant, Solomon, 1978. "Accounting for Business Income under Inflation: Current Issues and Views in the United States," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 24(1), pages 1-24, March.
  5. Roger H. Gordon & Burton G. Malkiel, 1980. "Taxation and Corporation Finance," NBER Working Papers 0576, National Bureau of Economic Research, Inc.
  6. Martin Feldstein, 1979. "Adjusting Depreciation in an Inflationary Economy: Indexing versus Acceleration," NBER Working Papers 0395, National Bureau of Economic Research, Inc.
  7. Malkiel, Burton G, 1979. "The Capital Formation Problem in the United States," Journal of Finance, American Finance Association, American Finance Association, vol. 34(2), pages 291-306, May.
  8. Feldstein, Martin S, 1976. "Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis," American Economic Review, American Economic Association, American Economic Association, vol. 66(5), pages 809-20, December.
  9. Alan J. Auerbach, 1980. "Inflation and the Tax Treatment of Firm Behavior," NBER Working Papers 0547, National Bureau of Economic Research, Inc.
  10. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(2), pages S3-27, April.
  11. Alan J. Auerbach, 1980. "A Note on the Efficient Design of Investment Incentives," NBER Working Papers 0483, National Bureau of Economic Research, Inc.
  12. Eisner, Robert, 1977. "Capital Shortage: Myth and Reality," American Economic Review, American Economic Association, American Economic Association, vol. 67(1), pages 110-15, February.
  13. 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.
  14. Auerbach, Alan J, 1979. "The Optimal Taxation of Heterogeneous Capital," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(4), pages 589-612, November.
  15. John B. Shoven & Jeremy I. Bulow, 1976. "Inflation Accounting and Nonfinancial Corporate Profits: Financial Assets and Liabilities," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(1), pages 15-66.
  16. Paul A. Samuelson, 1964. "Tax Deductibility of Economic Depreciation to Insure Invariant Valuations," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 72, pages 604.
  17. Feldstein, Martin S, 1977. "Does the United States Save too Little?," American Economic Review, American Economic Association, American Economic Association, vol. 67(1), pages 116-21, February.
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Cited by:
  1. David F. Bradford & Kyle Logue, 1998. "The Effects of Tax Law Changes on Property-Casualty Insurance Prices," NBER Chapters, in: The Economics of Property-Casualty Insurance, pages 29-80 National Bureau of Economic Research, Inc.

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