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Investment versus Savings Incentives: The Size of the Bang for the Buck and the Potential for Self-Financing Business Tax Cuts

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  • Alan J. Auerbach
  • Laurence J. Kotlikoff

Abstract

This 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 Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1027.

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Date of creation: Nov 1982
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Publication status: published as Kotlikoff, Laurence J. A short summary "National Savings and Economic Policy: The Efficacy of Investment vs. Savings Incentives." American Economic Review, Vol. 73, No. 2, (May 1983), pp. 82-87.
Handle: RePEc:nbr:nberwo:1027

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  1. 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.
  2. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Laurence J. Kotlikoff & Edward E. Leamer & Jeffrey Sachs, 1981. "The International Economics of Transitional Growth: The Case of the United States," NBER Working Papers 0773, National Bureau of Economic Research, Inc.
  4. Auerbach, Alan J & Kotlikoff, Laurence J & Skinner, Jonathan, 1983. "The Efficiency Gains from Dynamic Tax Reform," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(1), pages 81-100, February.
  5. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
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Cited by:
  1. Lyon, Andrew B., 1989. "The effect of the investment tax credit on the value of the firm," Journal of Public Economics, Elsevier, vol. 38(2), pages 227-247, March.
  2. Thomas Downs & Patric H. Hendershott, 1986. "Tax Policy and Stock Prices," NBER Working Papers 2094, National Bureau of Economic Research, Inc.
  3. Andrew B. Lyon, 1989. "Did ACRS Really Cause Stock Prices to Fall?," NBER Working Papers 2990, National Bureau of Economic Research, Inc.
  4. Patric H. Hendershott, 1985. "Tax reform and financial markets," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 29, pages 153-186.
  5. Don Fullerton & Yolanda K. Henderson, 1987. "The Marginal Excess Burden of Different Capital Tax Instruments," NBER Working Papers 2353, National Bureau of Economic Research, Inc.
  6. Alan J. Auerbach & James R. Hines Jr., 1986. "Tax Reform, Investment, and the Value of the Firm," NBER Working Papers 1803, National Bureau of Economic Research, Inc.
  7. Kocagil, Ahmet E, 1997. "Portfolio choice of government incentives: the case of commercialization of a new coal-based technology," Energy Policy, Elsevier, vol. 25(10), pages 887-896, August.
  8. Laurence J. Kotlikoff & Lawrence H. Summers, 1986. "Tax Incidence," NBER Working Papers 1864, National Bureau of Economic Research, Inc.
    • Kotlikoff, Laurence J. & Summers, Lawrence H., 1987. "Tax incidence," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 16, pages 1043-1092 Elsevier.
  9. Alan D. Viard, 2000. "The transition to consumption taxation, part 1: the impact on existing capital," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q3, pages 2-22.

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