Investment Tax Incentives and Frequent Tax Reforms
AbstractDespite the frequency of tax changes and their potential importance to investors, almost all of the analysis of tax-based investment incentives assumes investors never anticipate any tax changes. We depart from this approach by analyzing the historical pattern of U.S. corporate investment incentives over the period 1953-86, incorporating the feature of investor awareness that the tax code may change. Our analysis incorporates a predictive equation for future tax variables into a model of optimal investment subject to adjustment costs and uncertainty. We find that expectations of future tax changes significantly affect the incentive to invest only if adjustment costs are low. In this case, the incentive to invest in 1986 was strong, as investors are estimated to have anticipated the coming reduction in investment incentives.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2492.
Date of creation: Jan 1988
Date of revision:
Publication status: published as The American Economic Review, Vol. 78, No. 2, pp. 211-216, (May 1988).
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Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
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Other versions of this item:
- Auerbach, Alan J & Hines, James R, Jr, 1988. "Investment Tax Incentives and Frequent Tax Reforms," American Economic Review, American Economic Association, vol. 78(2), pages 211-16, May.
- Auerbach, A.J. & Hines, Jr.J.R., 1988. "Investment Tax Incentives And Frequent Tax Reforms," Papers, Princeton, Woodrow Wilson School - Public and International Affairs 135, Princeton, Woodrow Wilson School - Public and International Affairs.
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- Alan J. Auerbach & James R. Hines, Jr., 1987.
"Anticipated Tax Changes and the Timing of Investment,"
in: The Effects of Taxation on Capital Accumulation, pages 163-200
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: Taxes and Capital Formation, pages 85-92 National Bureau of Economic Research, Inc.
- Alan J. Auerbach & James R. Hines Jr., 1986. "Anticipated Tax Changes and the Timing of Investment," NBER Working Papers 1886, National Bureau of Economic Research, Inc.
- King, Mervyn A. & Fullerton, Don, 2010. "The Taxation of Income from Capital," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226436319, March.
- Auerbach, Alan J, 1989.
"Tax Reform and Adjustment Costs: The Impact on Investment and Market Value,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(4), pages 939-62, November.
- Alan J. Auerbach, 1986. "Tax Reform and Adjustment Costs: The Impact on Investment and Market Value," NBER Working Papers 2103, National Bureau of Economic Research, Inc.
- Alan J. Auerbach, 1983. "Corporate Taxation in the United States," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 451-514.
- 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.
- Abel, Andrew B, 1983. "Tax Neutrality in the Presence of Adjustment Costs," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 98(4), pages 705-12, November.
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