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Tax Policies For the 1990's: Personal Saving, Business Investment, and Corporate Debt

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Martin Feldstein

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Abstract

Although the tax reforms of the 1980s substantially lowered the excess burden caused by high marginal tax rates, there were also significant adverse effects on incentives to save and to invest in business plant and equipment. Effective tax rates on. real capital gains and real net interest income remain very high because the tax rules do not recognize the difference between real and nominal magnitudes. These high effective tax rates discourage personal saving. The paper discusses a number of ways in which the tax law could be modified to encourage more saving and less borrowing. Existing tax rules bias corporate decisions in favor of debt finance relative to equity finance and in favor of investments in intangible assets (like advertising, consumer goodwill, and R and D) relative to investments in plant and equipment. The paper discusses the use of a cashflow corporate tax (with complete expensing of investment and no deduction for interest payments) as a way of remedying both of these biases in our current tax law.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2837.

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Date of creation: Feb 1989
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Handle: RePEc:nbr:nberwo:2837

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Summers, Lawrence H, 1981. "Capital Taxation and Accumulation in a Life Cycle Growth Model," American Economic Review, American Economic Association, vol. 71(4), pages 533-44, September. [Downloadable!] (restricted)
  2. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S3-27, April. [Downloadable!] (restricted)
  3. Mervyn A. King, 1987. "The Cash Flow Corporate Income Tax," NBER Chapters, in: Taxes and Capital Formation, pages 109-110 National Bureau of Economic Research, Inc. [Downloadable!]
  4. Mervyn A. King, 1987. "The Cash Flow Corporate Income Tax," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 377-400 National Bureau of Economic Research, Inc. [Downloadable!]
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