Anticipated Tax Changes and the Timing of Investment
AbstractThis paper analyzes the short-run and long-run effects of corporate tax changes over the last three decades and the likely consequences of proposed future tax changes. Consideration of short-run effects of tax reform on investment and market value requires a careful analysis of three elements of behavior that are normally omitted from long run analyses: the state of investor expectations, the time lags involved in putting new capital in place, and the tax law's distinctions between new and old capital. The model described in this paper considers investment in equipment and investment in plant separately, and does so under different specifications of investor expectations. Our results for the period 1954-1985 suggest that investors did take account of fluctuations in profitability, real interest rates, and the tax code in making their investment plans. We examine the consequences of the nonindexation of depreciation benefits as well as the introduction of the investment tax credit and the Accelerated Cost Recovery System by simulating the corporate sector's performance in the absence of these features. In addition, we analyze the effects of changing the tax code in 1986 along the lines proposed in the Bradley-Gephardt "Fair Tax" plan, the Treasury II plan, and the Rostenkowski plan, H.R. 3838. The simulation results suggest that all three plans would reduce fixed investment in the short run, with the reduction coming primarily in equipment. At the same time, the simulations predict large wind-falls for existing capital assets under all three reform proposals.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1886.
Date of creation: Sep 1988
Date of revision:
Publication status: published as Alan J. Auerbach, James R. Hines, Jr.. "Anticipated Tax Changes and the Timing of Investment," in Martin Feldstein, ed., "The Effects of Taxation on Capital Accumulation" University of Chicago Press (1987)
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Other versions of this item:
- Alan J. Auerbach & James R. Hines, Jr., 1987. "Anticipated Tax Changes and the Timing of Investment," NBER Chapters, in: Taxes and Capital Formation, pages 85-92 National Bureau of Economic Research, Inc.
- Alan J. Auerbach & James R. Hines, Jr., 1987. "Anticipated Tax Changes and the Timing of Investment," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 163-200 National Bureau of Economic Research, Inc.
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- 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.
- Martin Feldstein & James M. Poterba & Louis Dicks-Mireaux, 1981.
"The Effective Tax Rate and the Pretax Rate of Return,"
NBER Working Papers
0740, National Bureau of Economic Research, Inc.
- 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.
- Abel, Andrew B & Blanchard, Olivier J, 1986.
"The Present Value of Profits and Cyclical Movements in Investment,"
Econometric Society, vol. 54(2), pages 249-73, March.
- Andrew B. Abel & Olivier J. Blanchard, 1987. "The Present Value of Profits and Cyclical Movements in Investment," NBER Working Papers 1122, National Bureau of Economic Research, Inc.
- Alan J. Auerbach & Martin Feldstein, 1980.
"Inflation and the Choice of Asset Life,"
NBER Working Papers
0253, National Bureau of Economic Research, Inc.
- 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.
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