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The Ineffectiveness of Effective Tax Rates on Business Investment

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  • Robert S. Chirinko

Abstract

In his Fisher-Schultz Lecture, Martin Feldstein examined the effects of non-neutral tax rules on business investment by estimating three econometric models, and he concluded that "the rising rate of inflation has, because of the structure of existing U.S. tax rules, substantially discouraged investment in the past 15 years." In a detailed examination of Feldstein's Effective Tax Rate model and a less extensive review of his other formulations (Neoclassical and Return-Over-Cost models), a number of important and independent criticisms are advanced. Our results from examining all three models suggest strongly that taxes have not adversely affected capital formation during the recent episode of inflation, a conclusion consistent with the relatively robust levels of net investment between 1965 and 1981 actually shown in the newly benchmarked National Income data.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1704.

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Date of creation: Sep 1985
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Publication status: published as Chirinko, Robert S. "The Ineffectiveness of Effective Tax Rates: A Comment on Feldstein's Fisher-Schultz Lecture," Journal of Public Economics Volume: 32 Issue: 3 (April 1987) Pages: 369-387
Handle: RePEc:nbr:nberwo:1704

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  1. Robert J. Gordon, 1979. "Energy Efficiency, User Cost Changes, and the Measurement of Durable Goods Prices," NBER Working Papers 0408, National Bureau of Economic Research, Inc.
  2. Sinai, Allen & Eckstein, Otto, 1983. "Tax policy and business fixed investment revisited," Journal of Economic Behavior & Organization, Elsevier, vol. 4(2-3), pages 131-162.
  3. Feldstein, Martin & Dicks-Mireaux, Louis & Poterba, James, 1983. "The effective tax rate and the pretax rate of return," Journal of Public Economics, Elsevier, vol. 21(2), pages 129-158, July.
  4. Sargent, Thomas J, 1981. "Interpreting Economic Time Series," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 213-48, April.
  5. Eisner, Robert, 1969. "Fiscal and Monetary Policy Reconsidered," American Economic Review, American Economic Association, vol. 59(5), pages 897-905, December.
  6. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  7. Ray C. Fair, 1981. "A Comment on Feldstein's Fisher-Schultz Lecture," NBER Working Papers 0716, National Bureau of Economic Research, Inc.
  8. Nerlove, Marc, 1972. "Lags in Economic Behavior," Econometrica, Econometric Society, vol. 40(2), pages 221-51, March.
  9. Don Fullerton, 1983. "Which Effective Tax Rate?," NBER Working Papers 1123, National Bureau of Economic Research, Inc.
  10. 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.
  11. Martin Feldstein & Lawrence Summers, 1983. "Inflation and the Taxation of Capital Income in the Corporate Sector," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 116-152 National Bureau of Economic Research, Inc.
  12. Humphrey, David Burras & Moroney, John R, 1975. "Substitution among Capital, Labor, and Natural Resource Products in American Manufacturing," Journal of Political Economy, University of Chicago Press, vol. 83(1), pages 57-82, February.
  13. Morrison, C. J. & Berndt, E. R., 1981. "Short-run labor productivity in a dynamic model," Journal of Econometrics, Elsevier, vol. 16(3), pages 339-365, August.
  14. Schmidt, Peter & Sickles, Robin, 1977. "Some Further Evidence on the Use of the Chow Test under Heteroskedasticity," Econometrica, Econometric Society, vol. 45(5), pages 1293-98, July.
  15. Mervyn A. King & Don Fullerton, 1984. "West Germany," NBER Chapters, in: The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany, pages 149-192 National Bureau of Economic Research, Inc.
  16. Auerbach, Alan J, 1979. "Inflation and the Choice of Asset Life," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 621-38, June.
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Cited by:
  1. 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.

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